UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): June 24, 2015 IHEARTMEDIA, INC. (Exact name of registrant as specified in its charter) Delaware 000-53354 26-0241222 (State or other jurisdiction of incorporation) (Commission File Number) (I.R.S. Employer Identification No.) 200 East Basse Road San Antonio, Texas 78209 (Address of principal executive offices) Registrant’s telephone number, including area code: (210) 822-2828 Not Applicable (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: ¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) ¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) ¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) ¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Transcript
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of theSecurities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 24, 2015
IHEARTMEDIA, INC.(Exact name of registrant as specified in its charter)
Delaware 000-53354 26-0241222
(State or other jurisdictionof incorporation)
(CommissionFile Number)
(I.R.S. EmployerIdentification No.)
200 East Basse RoadSan Antonio, Texas 78209
(Address of principal executive offices)
Registrant’s telephone number, including area code: (210) 822-2828
Not Applicable(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the followingprovisions:
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01 Other Events
Effective during the first quarter of 2015, and in connection with certain changes in senior management at Clear Channel Outdoor Holdings, Inc.,(“CCOH”) an indirect wholly owned subsidiary of iHeartMedia, Inc. (the “Company”), the Company reevaluated its segment reporting and determined thatCCOH’s Latin American operations were more appropriately aligned with the operations of the Americas Outdoor segment. As a result, the operations ofLatin America are no longer reflected within CCOH’s International Outdoor segment and are currently included in the results of the Americas Outdoorsegment. In addition, the Company reorganized a portion of its national representation business such that the cost of sales personnel for iHeartMedia radiostations are now included in the iHM segment and the national representation business no longer charges the iHM segment for intercompany cost allocations.These changes have been reflected in the Company’s segment reporting beginning in the first quarter of 2015.
In this Form 8-K, the Company is providing a revised Management’s Discussion and Analysis of Financial Condition and Results of Operations(“MD&A”) and consolidated financial statements and notes thereto for the years ended December 31, 2014, 2013 and 2012, to revise the segment disclosuresfor those periods to conform to its new organization structure. The revised MD&A and consolidated financial statements otherwise continue to speak as of thedate of the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”) with the Securities andExchange Commission (“SEC”) and have not been updated for events or developments that occurred subsequent to such filing. For developments since thefiling of the 2014 Form 10-K, please refer to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and the Company’s CurrentReports on Form 8-K filed since February 19, 2015, the filing date of the 2014 Form 10-K.
Annual revenue, direct operating expenses, selling, general and administrative (“SG&A”) expenses and depreciation and amortization associated withthe Latin American operations are provided below: (in thousands) Year Ended December 31, 2014 2013 2012 Revenue $97,433 $95,305 $88,412 Direct operating expenses 50,157 44,081 43,512 SG&A expenses 21,672 22,724 51,400 Depreciation and amortization 9,288 9,434 8,349
Annual revenue, direct operating expenses and SG&A expenses associated with the national representation business intercompany allocations and thereclassification of certain digital costs from SG&A to direct operating expenses are provided below: iHM Segment Other Segment Year Ended December 31, Year Ended December 31, 2014 2013 2012 2014 2013 2012 Revenue $ — $ — $ — $48,244 $45,871 $50,212 Direct operating expenses 6,585 10,933 6,129 — — — SG&A expenses 33,648 35,393 33,934 21,181 21,411 22,407
Item 9.01 Financial Statements and Exhibits
(d) Exhibits Exhibit No. Description
23.1 Consent of Independent Registered Public Accounting Firm
99.1 Revised Management’s Discussion and Analysis of Financial Condition and Results of Operations
99.2 Revised Financial Statements, Notes to Consolidated Financial Statements and Schedule
101 Interactive Data Files
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.
IHEARTMEDIA, INC.
Date: June 24, 2015 By: /s/ Scott D. HamiltonScott D. HamiltonSenior Vice President, Chief Accounting Officer and AssistantSecretary
Exhibit Index Exhibit No. Description
23.1 Consent of Independent Registered Public Accounting Firm
99.1 Revised Management’s Discussion and Analysis of Financial Condition and Results of Operations
99.2 Revised Financial Statements, Notes to Consolidated Financial Statements and Schedule
101 Interactive Data Files
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
1. Registration Statement (Form S-8) pertaining to the Clear Channel 2008 Executive Incentive Plan; Amended and Restated Clear ChannelCommunications, Inc. 2001 Stock Incentive Plan (No. 333-152647); and
2. Registration Statement (Form S-8) pertaining to the Clear Channel Nonqualified Deferred Compensation Plan (No. 333-152648)
of our report dated February 19, 2015 (except for Notes 2 and 13, as to which the date is June 24, 2015), with respect to the consolidated financial statementsand schedule of iHeartMedia, Inc., included in this Current Report on Form 8-K.
/s/ Ernst & Young LLP
San Antonio, TexasJune 24, 2015
EXHIBIT 99.1
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Format of Presentation
On September 16, 2014, the Company issued a press release that announced a change of its name to “iHeartMedia, Inc.” and a change to the namesof certain of its affiliates, including the following: Old Name: New Name:Clear Channel Capital I, LLC iHeartMedia Capital I, LLCClear Channel Capital II, LLC iHeartMedia Capital II, LLCClear Channel Communications, Inc. iHeartCommunications, Inc.Clear Channel Management Services, Inc. iHeartMedia Management Services, Inc.Clear Channel Broadcasting, Inc. iHeartMedia + Entertainment, Inc.Clear Channel Identity, Inc. iHM Identity, Inc.Clear Channel Satellite Services Inc. iHeartMedia Satellite Services, Inc.
Clear Channel Outdoor Holdings, Inc., an indirect subsidiary of the Company, retained its existing name.
Management’s discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with theconsolidated financial statements and related footnotes. Our discussion is presented on both a consolidated and segment basis. Our reportable segments areiHeartMedia (“iHM”), Americas outdoor advertising (“Americas outdoor” or “Americas outdoor advertising”), and International outdoor advertising(“International outdoor” or “International outdoor advertising”). Our iHM segment provides media and entertainment services via broadcast and digitaldelivery and also includes our national syndication business. Our Americas outdoor and International outdoor segments provide outdoor advertising servicesin their respective geographic regions using various digital and traditional display types. Included in the “Other” category are our media representationbusiness, Katz Media Group, as well as other general support services and initiatives, which are ancillary to our other businesses.
We manage our operating segments primarily focusing on their operating income, while Corporate expenses, Other operating income (expense), netInterest expense, Gain on marketable securities, Equity in earnings of nonconsolidated affiliates, Gain (loss) on extinguishment of debt, Other income(expense), net and Income tax benefit (expense) are managed on a total company basis and are, therefore, included only in our discussion of consolidatedresults.
Certain prior period amounts have been reclassified to conform to the 2014 presentation.
Effective during the first quarter of 2015, and in connection with certain changes in senior management at Clear Channel Outdoor Holdings, Inc., anindirect wholly owned subsidiary of iHeartMedia, Inc. (the “Company”), the Company reevaluated its segment reporting and determined that its LatinAmerican operations were more appropriately aligned with the operations of its Americas Outdoor segment. As a result, the operations of Latin America areno longer reflected within the Company’s International Outdoor segment and are currently included in the results of its Americas Outdoor segment. Inaddition, the Company reorganized a portion of its national representation business such that the cost of sales personnel for iHeartMedia (“’iHM”) radiostations are now included in the iHM segment and its national representation business no longer charges iHM for intercompany cost allocations. Thesechanges have been reflected in the Company’s segment reporting beginning in the first quarter of 2015.
iHM
Our revenue is derived primarily from selling advertising time, or spots, on our radio stations, with advertising contracts typically less than one yearin duration. The programming formats of our radio stations are designed to reach audiences with targeted demographic characteristics that appeal to ouradvertisers. We also provide streaming content via the Internet, mobile and other digital platforms which reach national, regional and local audiences andderive revenues primarily from selling advertising time with advertising contracts similar to those used by our radio stations.
iHM management monitors average advertising rates, which are principally based on the length of the spot and how many people in a targetedaudience listen to our stations, as measured by an independent ratings service. Also, our advertising rates are influenced by the time of day the advertisementairs, with morning and evening drive-time hours typically priced the highest. Management monitors yield per available minute in addition to average ratesbecause yield allows management to track revenue performance across our inventory. Yield is measured by management in a variety of ways, includingrevenue earned divided by minutes of advertising sold.
1
Management monitors macro-level indicators to assess our iHM operations’ performance. Due to the geographic diversity and autonomy of ourmarkets, we have a multitude of market-specific advertising rates and audience demographics. Therefore, management reviews average unit rates across eachof our stations.
Management looks at our iHM operations’ overall revenue as well as the revenue from each type of advertising, including local advertising, whichis sold predominately in a station’s local market, and national advertising, which is sold across multiple markets. Local advertising is sold by each radiostation’s sales staff while national advertising is sold by our national sales team and through our national representation firm. Local advertising, which is ourlargest source of advertising revenue, and national advertising revenues are tracked separately because these revenue streams have different sales forces andrespond differently to changes in the economic environment. We periodically review and refine our selling structures in all markets in an effort to maximizethe value of our offering to advertisers and, therefore, our revenue.
Management also looks at iHM revenue by market size. Typically, larger markets can reach larger audiences with wider demographics than smallermarkets. Additionally, management reviews our share of iHM advertising revenues in markets where such information is available, as well as our share oftarget demographics listening in an average quarter hour. This metric gauges how well our formats are attracting and retaining listeners.
A portion of our iHM segment’s expenses vary in connection with changes in revenue. These variable expenses primarily relate to costs in our salesdepartment, such as commissions, and bad debt. Our programming and general and administrative departments incur most of our fixed costs, such as utilitiesand office salaries. We incur discretionary costs in our marketing and promotions, which we primarily use in an effort to maintain and/or increase ouraudience share. Lastly, we have incentive systems in each of our departments which provide for bonus payments based on specific performance metrics,including ratings, sales levels, pricing and overall profitability.
Outdoor Advertising
Our outdoor advertising revenue is derived from selling advertising space on the displays we own or operate in key markets worldwide, consistingprimarily of billboards, street furniture and transit displays. Part of our long-term strategy for our outdoor advertising businesses is to pursue the technologyof digital displays, including flat screens, LCDs and LEDs, as additions to traditional methods of displaying our clients’ advertisements. We are currentlyinstalling these technologies in certain markets, both domestically and internationally.
Management typically monitors our outdoor advertising business by reviewing the average rates, average revenue per display, occupancy, andinventory levels of each of our display types by market.
We own the majority of our advertising displays, which typically are located on sites that we either lease or own or for which we have acquiredpermanent easements. Our advertising contracts with clients typically outline the number of displays reserved, the duration of the advertising campaign andthe unit price per display.
The significant expenses associated with our operations include direct production, maintenance and installation expenses as well as site leaseexpenses for land under our displays including revenue-sharing or minimum guaranteed amounts payable under our billboard, street furniture and transitdisplay contracts. Our direct production, maintenance and installation expenses include costs for printing, transporting and changing the advertising copy onour displays, the related labor costs, the vinyl and paper costs, electricity costs and the costs for cleaning and maintaining our displays. Vinyl and paper costsvary according to the complexity of the advertising copy and the quantity of displays. Our site lease expenses include lease payments for use of the landunder our displays, as well as any revenue-sharing arrangements or minimum guaranteed amounts payable that we may have with the landlords. The terms ofour site leases and revenue-sharing or minimum guaranteed contracts generally range from one to 20 years.
Americas Outdoor Advertising
Our advertising rates are based on a number of different factors including location, competition, type and size of display, illumination, market andgross ratings points. Gross ratings points are the total number of impressions delivered by a display or group of displays, expressed as a percentage of amarket population. The number of impressions delivered by a display is measured by the number of people passing the site during a defined period of time.For all of our billboards in the United States, we use independent, third-party auditing companies to verify the number of impressions delivered by a display.
Client contract terms typically range from four weeks to one year for the majority of our display inventory in the United States. Generally, we ownthe street furniture structures and are responsible for their construction and maintenance. Contracts for the right to place our street furniture and transitdisplays and sell advertising space on them are awarded by municipal and transit authorities in competitive bidding processes governed by local law or arenegotiated with private transit operators. Generally, these contracts have terms ranging from 10 to 20 years.
2
International Outdoor Advertising
Similar to our Americas outdoor business, advertising rates generally are based on the gross ratings points of a display or group of displays. Thenumber of impressions delivered by a display, in some countries, is weighted to account for such factors as illumination, proximity to other displays and thespeed and viewing angle of approaching traffic. In addition, because our International outdoor advertising operations are conducted in foreign markets,including Europe, Asia and Australia, management reviews the operating results from our foreign operations on a constant dollar basis. A constant dollarbasis allows for comparison of operations independent of foreign exchange movements.
Our International display inventory is typically sold to clients through network packages, with client contract terms typically ranging from one totwo weeks with terms of up to one year available as well. Internationally, contracts with municipal and transit authorities for the right to place our streetfurniture and transit displays typically provide for terms ranging from three to 15 years. The major difference between our International and Americas streetfurniture businesses is in the nature of the municipal contracts. In our International outdoor business, these contracts typically require us to provide themunicipality with a broader range of metropolitan amenities in exchange for which we are authorized to sell advertising space on certain sections of thestructures we erect in the public domain. A different regulatory environment for billboards and competitive bidding for street furniture and transit displaycontracts, which constitute a larger portion of our business internationally, may result in higher site lease costs in our International business. As a result, ourmargins are typically lower in our International business than in our Americas outdoor business.
Macroeconomic Indicators
Our advertising revenue for all of our segments is highly correlated to changes in gross domestic product (“GDP”) as advertising spending hashistorically trended in line with GDP, both domestically and internationally. According to the U.S. Department of Commerce, estimated U.S. GDP growth for2014 was 2.4%. Internationally, our results are impacted by fluctuations in foreign currency exchange rates as well as the economic conditions in the foreignmarkets in which we have operations.
3
Executive Summary
The key developments in our business for the year ended December 31, 2014 are summarized below:
• Consolidated revenue increased $75.5 million including a decrease of $22.7 million from movements in foreign exchange during 2014compared to 2013. Excluding foreign exchange impacts, consolidated revenue increased $98.2 million over 2013.
• iHM revenue increased $29.9 million during 2014 compared to 2013 primarily driven by increased revenues from political advertising,our traffic and weather business, and core national broadcast radio.
• Americas outdoor revenue decreased $35.1 million compared to 2013, including a decrease of $9.4 million from movements in foreign
exchange. Excluding foreign exchange impacts, revenue decreased $25.7 million over 2013 primarily driven by lower nationaladvertising revenues.
• International outdoor revenue increased $50.2 million compared to 2013, including a decrease of $13.3 million from movements in
foreign exchange. Excluding foreign exchange impacts, revenue increased $63.5 million compared to 2013 primarily driven by growthin both Europe and emerging markets.
• Revenues in our Other category increased $30.7 million compared to 2013 primarily as a result of higher political revenues and acontract termination fee of $15.0 million earned by our media representation business.
• We spent $70.6 million on strategic revenue and cost-saving initiatives during 2014 to realign and improve our on-going businessoperations—an increase of $12.7 million compared to 2013.
• During 2014, iHeartCommunications completed several refinancing transactions, including a $1,000.0 million issuance of 9.0%Priority Guarantee Notes due 2022, an $850.0 million issuance of 10.0% Senior Notes due 2018, and a new issuance and sale to asubsidiary of $222.2 million of 14.0% Senior Notes due 2021. The proceeds from these transactions were used to repay or redeemexisting indebtedness of iHeartCommunications, as well as pay associated fees and expenses.
• Throughout 2014, CC Finco, LLC (“CC Finco”), an indirect wholly-owned subsidiary of ours, repurchased $239.0 million principal
amount of notes, for a total purchase price of $222.4 million, including accrued interest. Of these notes repurchased, $177.1 millionprincipal amount were not cancelled and remain outstanding.
• On December 11, 2014, we announced that one of our subsidiaries had entered into an agreement with Vertical Bridge Acquisitions,LLC (“Buyer”), for the sale of 411 of our broadcast communications tower sites and related assets for up to $400.0 million (the “TowerPortfolio”). The acquisition of the Tower Portfolio may occur in one or more closings, and the transaction is subject to due diligenceand other customary closing conditions. The Buyer is required to acquire at least 85% of the Tower Portfolio. Simultaneous with eachclosing of the sale of the towers, we will enter into lease agreements for the continued use of the subject towers. The initial term of eachlease will be fifteen years followed by three option periods of five years each, subject to exclusions and limitations. If Buyer acquiresthe entire Tower Portfolio, we will have annual lease payments of approximately $22.7 million, a loss of annual tenant revenues ofapproximately $11.6 million and an annual reduction of direct operating expenses of approximately $3.8 million.
4
RESULTS OF OPERATIONS
Year ended December 31, 2014 Compared to Year ended December 31, 2013
Consolidated Results of Operations
The comparison of our results of operations for the year ended December 31, 2014 to the year ended December 31, 2013 is as follows: (In thousands) Years Ended December 31, %
Direct operating expenses (excludes depreciation and amortization) 2,540,950 2,565,020 (1%) Selling, general and administrative expenses (excludes depreciation and amortization) 1,680,623 1,638,928 3% Corporate expenses (excludes depreciation and amortization) 320,331 313,514 2% Depreciation and amortization 710,898 730,828 (3%) Impairment charges 24,176 16,970 42% Other operating income, net 40,031 22,998 74%
Operating income 1,081,586 1,000,782 8% Interest expense 1,741,596 1,649,451 6% Gain on marketable securities — 130,879 Equity in loss of nonconsolidated affiliates (9,416) (77,696) Loss on extinguishment of debt (43,347) (87,868) Other income (expense), net 9,104 (21,980)
Loss before income taxes (703,669) (705,334) Income tax benefit (expense) (58,489) 121,817
Consolidated net loss (762,158) (583,517) Less amount attributable to noncontrolling interest 31,603 23,366
Net loss attributable to the Company $ (793,761) $ (606,883)
Consolidated Revenue
Our consolidated revenue during 2014 increased $75.5 million, including a decrease of $22.7 million from movements in foreign exchangecompared to 2013. Excluding the impact of foreign exchange movements, consolidated revenue increased $98.2 million. Our iHM revenue increased $29.9million driven by increased revenues from political advertising, our traffic and weather business, core national broadcast radio and digital revenues. Americasoutdoor revenue decreased $35.1 million compared to 2013, including negative movements in foreign exchange of $9.4 million. Excluding the impact offoreign exchange movements, Americas outdoor revenue decreased $25.7 million primarily driven by lower revenues generated by national accounts and thenonrenewal of certain airport contracts and lower revenues in our Los Angeles market as a result of the impact of litigation. Our International outdoor revenueincreased $50.2 million compared to 2013, including negative movements in foreign exchange of $13.3 million. Excluding the impact of foreign exchangemovements, International outdoor revenue increased $63.5 million primarily driven by new contracts and growth in Europe and emerging markets. Otherrevenues increased $30.7 million primarily as a result of higher political revenues and a contract termination fee of $15 million earned by our mediarepresentation business.
Consolidated Direct Operating Expenses
Consolidated direct operating expenses during 2014 decreased $24.1 million, including a decrease of $11.9 million from movements in foreignexchange compared to 2013. Excluding the impact of foreign exchange movements, consolidated direct operating expenses decreased $12.2 million. OuriHM direct operating expenses decreased $25.9 million compared to 2013, primarily due to lower costs in our national syndication business partially offsetby higher programming and content costs. Direct operating expenses in our Americas outdoor segment decreased $5.0 million compared to 2013, including adecrease of $6.0 million from movements in foreign exchange. Excluding the impact of foreign exchange movements, direct operating expenses in ourAmericas outdoor segment increased $1.0 million. Direct operating expenses in our International outdoor segment increased $7.1 million compared to 2013,including a decrease of $5.9 million from movements in foreign exchange. Excluding the impact of foreign exchange movements, direct operating expensesin our International outdoor segment increased $13.0 million primarily as a result of higher variable costs associated with new contracts.
5
Consolidated Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses during 2014 increased $41.7 million, including a decrease of $4.5 million from movements in foreign exchangecompared to 2013. Excluding the impact of foreign exchange movements, consolidated SG&A expenses increased $46.2 million. Our iHM SG&A expensesincreased $34.2 million primarily due to higher compensation expense, including commissions. SG&A expenses decreased $9.8 million in our Americasoutdoor segment including a decrease of $1.9 million from movements in foreign exchange compared to 2013. Excluding the impact of foreign exchangemovements, SG&A expenses in our Americas outdoor segment decreased $7.9 million primarily due to lower commission expense in connection with lowerrevenues and property tax refunds. Our International outdoor SG&A expenses increased $14.8 million compared to 2013, including a $2.7 million decreasedue to the effects of movements in foreign exchange. Excluding the impact of foreign exchange movements, SG&A expenses in our International outdoorsegment increased $17.5 million primarily due to higher compensation expense, including commissions, in connection with higher revenues, as well ashigher litigation expenses.
Corporate Expenses
Corporate expenses increased $6.8 million compared to 2013, primarily due to increased employee benefits costs, higher strategic revenue andefficiency costs and higher compensation expenses related to our variable compensation plans, partially offset by an $8.5 million credit for the realization ofan insurance recovery related to litigation filed by stockholders of Clear Channel Outdoor Holdings, Inc. (“CCOH”), an indirect non-wholly ownedsubsidiary of iHeartCommunications, which is, in turn, an indirect wholly owned subsidiary of ours, and lower legal costs related to this litigation.
Revenue and Efficiency Initiatives
Included in the amounts for direct operating expenses, SG&A and corporate expenses discussed above are expenses of $70.6 million incurred inconnection with our strategic revenue and efficiency initiatives. The costs were incurred to improve revenue growth, enhance yield, reduce costs, andorganize each business to maximize performance and profitability. These costs consist primarily of consolidation of locations and positions, severancerelated to workforce initiatives, consulting expenses, and other costs incurred in connection with streamlining our businesses.
Of the strategic revenue and efficiency costs, $13.0 million are reported within direct operating expenses, $23.6 million are reported within SG&Aand $34.0 million are reported within corporate expense. In 2013, such costs totaled $15.1 million, $22.3 million, and $20.5 million, respectively.
Impairment Charges
We performed our annual impairment tests as of October 1, 2014 and 2013 on our goodwill, FCC licenses, billboard permits, and other intangibleassets. In addition, we test for impairment of property, plant and equipment whenever events and circumstances indicate that depreciable assets might beimpaired. As a result of these impairment tests, we recorded impairment charges of $24.2 million and $17.0 million during 2014 and 2013, respectively.During 2014, we recognized a $15.7 impairment charge related to FCC licenses in eight markets due to changes in the discount rates and weight-average costof capital for those markets. During 2013, we recognized a $10.7 million goodwill impairment charge in our International outdoor segment related to adecline in the estimated fair value of one market. Please see Note 2 to the consolidated financial statements included in Item 8 of Part II of this Annual Reporton Form 10-K for a further description of the impairment charges.
Depreciation and Amortization
Depreciation and amortization decreased $19.9 million during 2014 compared to 2013, primarily due to intangible assets becoming fullyamortized.
Other Operating Income, Net
Other operating income of $40.0 million in 2014 primarily related to a non-cash gain of $43.5 million recognized on the sale of non-core radiostations in exchange for a portfolio of 29 stations in five markets.
Other operating income of $23.0 million in 2013 primarily related to the gain on the sale of certain outdoor assets in our Americas outdoor segment.
Interest Expense
Interest expense increased $92.1 million during 2014 compared to 2013 primarily due to the weighted average cost of debt increasing as a result ofdebt refinancings that occurred since 2013. Please refer to “Sources of Capital” for additional discussion of debt issuances and exchanges. Our weightedaverage cost of debt during 2014 and 2013 was 8.1% and 7.6%, respectively.
6
Gain On Marketable Securities
The gain on marketable securities of $130.9 million during 2013 resulted from the sale of the shares we held in Sirius XM Radio, Inc.
Equity in Loss of Nonconsolidated Affiliates
Equity in loss of nonconsolidated affiliates of $9.4 million for 2014 primarily related to the $4.5 million gain on the sale of our 50% interest inBuspak in the third quarter, offset by the first quarter 2014 sale of our 50% interest in Australian Radio Network Pty Ltd (“ARN”), which included a loss onthe sale of $2.4 million and $11.5 million of foreign exchange losses that were reclassified from accumulated other comprehensive income at the date of thesale.
Equity in loss of nonconsolidated affiliates of $77.7 million for 2013 primarily included the loss from our investments in Australia Radio Networkand New Zealand Radio Network. On February 18, 2014, a subsidiary of ours sold its 50% interest in ARN. As of December 31, 2013 the book value of ourinvestment in ARN exceeded the estimated selling price. Accordingly, we recorded an impairment charge of $95.4 million during the fourth quarter of 2013to write down the investment to its estimated fair value.
Loss on Extinguishment of Debt
During the fourth quarter of 2014, CC Finco repurchased $57.1 million aggregate principal amount of iHeartCommunications’ 5.5% Senior Notesdue 2016 and $120.0 million aggregate principal amount of iHeartCommunications’ 10.0% Senior Notes due 2018 for a total of $159.3 million, includingaccrued interest, through open market purchases. In connection with these transactions, we recognized a net gain of $12.9 million.
In September of 2014, iHeartCommunications prepaid $974.9 million of the loans outstanding under its Term Loan B facility and $16.1 million ofthe loans outstanding under its Term Loan C asset sale facility. In connection with these transactions, we recognized a loss of $4.8 million.
During June 2014, iHeartCommunications redeemed $567.1 million aggregate principal amount of its outstanding 5.5% Senior Notes due 2014 and$241.0 million aggregate principal amount of its outstanding 4.9% Senior Notes due 2015. In connection with these transactions, we recognized a loss of$47.5 million.
During the first quarter of 2014, CC Finco repurchased $52.9 million aggregate principal amount of iHeartCommunications’ outstanding 5.5%Senior Notes due 2014 and $9.0 million aggregate principal amount of iHeartCommunications’ outstanding 4.9% Senior Notes due 2015 for a total of $63.1million, including accrued interest, through open market purchases. In connection with these transactions, we recognized a loss of $3.9 million.
During 2013, we recognized a loss of $84.0 million due to a debt exchange related to iHeartCommunications’ 10.75% Senior Cash Pay Notes due2016 and 11.00%/11.75% Senior Toggle Notes due 2016 into 14.0% Senior Notes due 2021. In addition, we recognized a loss of $3.9 million due to thewrite-off of deferred loan costs in connection with the prepayment of Term Loan A of iHeartCommunications’ senior secured credit facilities.
Other Income (Expense), Net
Other income of $9.1 million for 2014 primarily related to gains on foreign exchange transactions.
In connection with the June 2013 exchange offer of a portion of 10.75% Senior Cash Pay Notes due 2016 and 11.00%/11.75% Senior Toggle Notesdue 2016 for newly-issued 14.0% Senior Notes due 2021 and in connection with the senior secured credit facility amendments discussed elsewhere in theMD&A, all of which were accounted for as modifications of existing debt, we incurred expenses of $23.6 million partially offset by $1.8 million in foreignexchange gains on short-term intercompany accounts.
Income Tax Benefit (Expense)
The effective tax rate for the year ended December 31, 2014 was (8.3%) compared to 17.3% for the year ended December 31, 2013. The effective taxrate for 2014 was impacted by the $339.8 million valuation allowance recorded against the Company’s current period federal and state net operating lossesdue to the uncertainty of the ability to utilize those losses in future periods. This expense was partially offset by $28.9 million in net tax benefits associatedwith a decrease in unrecognized tax benefits resulting from the expiration of statutes of limitations to assess taxes in the United Kingdom and several statejurisdictions.
The effective tax rate for the year ended December 31, 2013 was 17.3% and was primarily impacted by the $143.5 million valuation allowancerecorded during the period as additional deferred tax expense. The valuation allowance was recorded against a portion of the U.S. Federal and State netoperating losses due to the uncertainty of the ability to utilize those losses in future periods. This expense was partially offset by tax benefits recorded duringthe period due to the settlement of our U.S. Federal and certain State tax examinations during the year. Pursuant to the settlements, we recorded a reduction toincome tax expense of approximately $20.2 million to reflect the net tax benefits of the settlements.
iHM Results of Operations
Our iHM operating results were as follows: (In thousands) Years Ended December 31, %
iHM revenue increased $29.9 million during 2014 compared to 2013 driven primarily by political advertising, our traffic and weather business andthe impact of strategic sales initiatives, and higher core national broadcast revenues, including events and digital revenue. Digital streaming revenue washigher for the year as a result of increased advertising on our iHeartRadio platform. Partially offsetting these increases was a decrease in core local broadcastradio and syndication revenues.
Direct operating expenses decreased $25.9 million during 2014, primarily resulting from lower costs in our national syndication business partially
offset by higher programming and content costs, including sports programming and music license and performance royalties. SG&A expenses increased$34.2 million during 2014 primarily due to higher compensation expense, including commissions. Strategic revenue and efficiency costs included in SG&Aexpenses increased $4.4 million compared to 2013.
7
Depreciation and amortization decreased $21.3 million, primarily due to intangible assets becoming fully amortized.
Americas Outdoor Advertising Results of Operations
Our Americas outdoor advertising operating results were as follows: (In thousands) Year Ended December 31, %
Our Americas outdoor revenue decreased $35.1 million compared to 2013, including negative movements in foreign exchange of $9.4 million.Excluding the impact of foreign exchange movements, Americas outdoor revenue decreased $25.7 million driven primarily by lower spending by nationalaccounts and the nonrenewal of certain airport contracts. Revenues were also lower in our Los Angeles market as a result of the impact of litigation asdiscussed further in Item 3 of Part I of this Annual Report on Form 10-K.
Direct operating expenses decreased $5.0 million compared to 2013, including a decrease of $6.0 million from movements in foreign exchange.Excluding the impact of foreign exchange movements, direct operating expenses in our Americas outdoor segment increased $1.0 million. SG&A expensesdecreased $9.8 million compared to 2013, including a decrease of $1.9 million from movements in foreign exchange. Excluding the impact of foreignexchange movements, SG&A expenses in our Americas outdoor segment decreased $7.9 million primarily due to lower commission expense in connectionwith lower revenues and property tax refunds.
International Outdoor Advertising Results of Operations
Our International outdoor advertising operating results were as follows: (In thousands) Year Ended December 31, %
International outdoor revenue increased $50.2 million compared to 2013, including a decrease of $13.3 million from movements in foreignexchange. Excluding the impact of foreign exchange movements, revenues increased $63.5 million primarily driven by revenue growth in Europe includingItaly, due to a new contract for airports in Rome, as well as Sweden, France, and the UK. Revenue in emerging markets also increased, particularly in Chinaand Mexico primarily as a result of new contracts.
Direct operating expenses increased $7.1 million compared to 2013, including a decrease of $5.9 million from movements in foreign exchange.Excluding the impact of movements in foreign exchange, direct operating expenses increased $13.0 million primarily as a result of higher variable costsassociated with new contracts, including the Rome airports contract in Italy. SG&A expenses increased $14.8 million compared to 2013, including a decreaseof $2.7 million from movements in foreign exchange. Excluding the impact of movements in foreign exchange, SG&A expenses increased $17.5 millionprimarily due to higher compensation expense, including commissions, in connection with higher revenues, as well as higher litigation expenses.
8
Year Ended December 31, 2013 as Compared to Year Ended December 31, 2012
Consolidated Results of Operations
The comparison of our historical results of operations for the year ended December 31, 2013 to the year ended December 31, 2012 is as follows: (In thousands) Years Ended December 31, %
Direct operating expenses (excludes depreciation and amortization) 2,565,020 2,504,529 2% Selling, general and administrative expenses (excludes depreciation and amortization) 1,638,928 1,660,289 (1%) Corporate expenses (excludes depreciation and amortization) 313,514 293,207 7% Depreciation and amortization 730,828 729,285 0% Impairment charges 16,970 37,651 (55%) Other operating income, net 22,998 48,127 (52%)
9
(In thousands) Years Ended December 31, % Change 2013 2012
Operating income 1,000,782 1,070,050 (6%) Interest expense 1,649,451 1,549,023 Gain (loss) on marketable securities 130,879 (4,580) Equity in earnings (loss) of nonconsolidated affiliates (77,696) 18,557 Loss on extinguishment of debt (87,868) (254,723) Other income (expense), net (21,980) 250
Loss before income taxes (705,334) (719,469) Income tax benefit 121,817 308,279
Consolidated net loss (583,517) (411,190) Less amount attributable to noncontrolling interest 23,366 13,289 Net loss attributable to the Company $ (606,883) $ (424,479)
Consolidated Revenue
Our consolidated revenue decreased $3.8 million including the increase of $3.5 million from the impact of movements in foreign exchangecompared to 2012. Excluding the impact of foreign exchange movements and $20.4 million impact of our divestiture of our international neon businessduring 2012, revenue increased $13.1 million. iHM revenue increased $46.8 million, driven by growth from national advertising includingtelecommunications, retail, and entertainment, and higher advertising revenues from our digital services primarily as a result of increased demand as listeninghours have increased. Americas outdoor revenue increased $18.1 million, driven primarily by bulletin revenue growth as a result of increases in occupancy,capacity and rates in our traditional and digital product lines. International outdoor revenue decreased $18.8 million including the impact of favorablemovements in foreign exchange of $8.6 million compared to 2012. Excluding the impact of foreign exchange movements and the $20.4 million impact ofour divestiture of our international neon business during 2012, International outdoor revenue decreased $7.0 million. Declines in certain countries as a resultof weakened macroeconomic conditions were partially offset by growth in street furniture and billboard revenue in other countries. Revenue in our Othercategory declined $49.7 million as a result of decreased political advertising through our media representation business.
Consolidated Direct Operating Expenses
Direct operating expenses increased $60.5 million including an increase of $3.6 million due to the effects of movements in foreign exchangecompared to 2012 and the impact of our divestiture of our international neon business of $13.0 million during 2012. iHM direct operating expensesincreased $64.7 million, primarily due to higher promotional and sponsorship costs for events such as the iHeartRadio Music Festival and Jingle Balls and anincrease in digital expenses related to our iHeartRadio digital platform including higher digital streaming fees due to increased listening hours, as well asmusic licensing fees, partially offset by a decline in traffic expenses. Americas outdoor direct operating expenses decreased $15.1 million, primarily due todecreased site lease expense associated with declining revenues of some of our lower-margin product lines. Direct operating expenses in our Internationaloutdoor segment increased $6.3 million, including a $6.4 million increase due to the effects of movements in foreign exchange.
Consolidated SG&A Expenses
SG&A expenses decreased $21.4 million including an increase of $1.7 million due to the effects of movements in foreign exchange compared to2012. iHM SG&A expenses increased $25.5 million primarily due to compensation expenses and amounts related to our variable compensation plansincluding commissions, which were higher for the 2013 period in connection with increasing national and digital revenues. SG&A expenses in our Americasoutdoor segment decreased $19.2 million including a $7.8 million decrease in expenses related to a favorable court ruling in 2012 and due to certainexpenses during the 2012 period related to legal and other costs in Brazil that did not recur during 2013. Our International outdoor SG&A expensesdecreased $11.9 million including a $3.1 million increase due to the effects of movements in foreign exchange compared to the same period of 2012.Excluding the impact of foreign exchange movements and excluding the $4.2 million impact of our divestiture of our international neon business during2012, SG&A expenses decreased $10.8 million primarily due to lower expenses as a result of cost saving initiatives.
10
Corporate Expenses
Corporate expenses increased $20.3 million during 2013 compared to 2012. This increase was primarily driven by increases in compensationexpenses including amounts related to our variable compensation plans and strategic initiatives as well as $7.8 million in executive transition costs and legalcosts related to stockholder litigation.
Revenue and Efficiency Initiatives
Included in the amounts for direct operating expenses, SG&A and corporate expenses discussed above are expenses of $57.9 million incurred inconnection with our strategic revenue and efficiency initiatives. The costs were incurred to improve revenue growth, enhance yield, reduce costs, andorganize each business to maximize performance and profitability. These costs consist primarily of consulting expenses, consolidation of locations andpositions, severance related to workforce initiatives and other costs incurred in connection with streamlining our businesses. These costs are expected toprovide benefits in future periods as the initiative results are realized. Of these costs, $15.1 million are reported within direct operating expenses, $22.3million are reported within SG&A and $20.5 million are reported within corporate expense. In 2012, such costs totaled $13.8 million, $47.2 million, and$15.2 million, respectively.
Depreciation and Amortization
Depreciation and amortization increased $1.5 million during 2013 compared to 2012, primarily due to fixed asset additions primarily consisting ofdigital assets and software, which are depreciated over shorter useful lives partially offset by various assets becoming fully depreciated in 2013.
Impairment Charges
We performed our annual impairment tests as of October 1, 2013 and 2012 on our goodwill, FCC licenses, billboard permits, and other intangibleassets and recorded impairment charges of $17.0 million and $37.7 million, respectively. During 2013, we recognized a $10.7 million goodwill impairmentcharge in our International outdoor segment related to a decline in the estimated fair value of one market. Please see Note 2 to the consolidated financialstatements included in Item 8 of Part II of this Annual Report on Form 10-K for a further description of the impairment charges.
Other Operating Income, Net
Other operating income of $23.0 million in 2013 primarily related to the gain on the sale of certain outdoor assets in our Americas outdoor segment.
Other operating income of $48.1 million in 2012 primarily related to the gain on the sale of our international neon business in the third quarter of2012.
Interest Expense
Interest expense increased $100.4 million during 2013 compared to 2012 primarily as a result of interest expense associated with the impact ofrefinancing transactions resulting in higher interest rates. Please refer to “—Sources of Capital” for additional discussion of debt issuances and exchanges.Our weighted average cost of debt during 2013 and 2012 was 7.6% and 6.7%, respectively.
Gain (Loss) on Marketable Securities
The gain on marketable securities of $130.9 million during 2013 resulted from the sale of the shares we held in Sirius XM Radio, Inc.
The loss on marketable securities of $4.6 million during 2012 primarily related to the impairment of our investment in Independent News & MediaPLC (“INM”) during 2012 and the impairment of a cost-basis investment during 2012. The fair value of INM was below cost for an extended period of timeand recovery of the value was not probable. As a result, we considered the guidance in ASC 320-10-S99 and reviewed the length of the time and the extent towhich the market value was less than cost, the financial condition and the near-term prospects of the issuer. After this assessment, we concluded that theimpairment at each date was other than temporary and recorded non-cash impairment charges to our investment in INM, as noted above. We obtained thefinancial information for our cost-basis investment and noted continued doubt of the investment’s ability to continue as a going concern. After evaluatingthe financial condition of the investment, we concluded that the investment was other than temporarily impaired and recorded a non-cash impairment chargeto that investment.
11
Equity in Earnings (Loss) of Nonconsolidated Affiliates
Equity in loss of nonconsolidated affiliates of $77.7 million for 2013 primarily included the loss from our investments in ARN and New ZealandRadio Network. On February 18, 2014, a subsidiary of the Company sold its 50% interest in ARN. As of December 31, 2013 the book value of our investmentin ARN exceeded the estimated selling price. Accordingly, we recorded an impairment charge of $95.4 million during the fourth quarter of 2013 to writedown the investment to its estimated fair value.
Equity in earnings of nonconsolidated affiliates of $18.6 million for 2012 primarily included earnings from our investments in Australia RadioNetwork and New Zealand Radio Network.
Loss on Extinguishment of Debt
We recognized a loss of $84.0 million due to a debt exchange during the fourth quarter of 2013 related to iHeartCommunications’ 10.75% SeniorCash Pay Notes due 2016 and 11.00%/11.75% Senior Toggle Notes due 2016 into 14.0% Senior Notes due 2021. In addition, we recognized a loss of $3.9million due to the write-off of deferred loan costs in connection with the prepayment of Term Loan A of iHeartCommunications’ senior secured creditfacilities.
In connection with the refinancing of Clear Channel Worldwide Holdings, Inc. (“CCWH”) Series A Senior Notes and Series B Senior Notes due2017 with an interest rate of 9.25% (the “Existing CCWH Senior Notes”) with the CCWH Series A Senior Notes and Series B Senior Notes due 2022 with astated interest rate of 6.5% (the “CCWH Senior Notes”) during the fourth quarter of 2012, CCWH paid existing note holders a tender premium of 7.4% of facevalue on the $1,724.7 million of Existing CCWH Senior Notes that were tendered in the tender offer and a call premium of 6.9% on the $775.3 million ofExisting CCWH Senior Notes that were redeemed following the tender offer. The tender premium of $128.3 million and the call premium of $53.8 million areincluded in the loss on extinguishment of debt. In addition, we recognized a loss of $39.0 million due to the write-off of deferred loan costs in connectionwith the call of the Existing CCWH Senior Notes, and recognized losses of $33.7 million in connection with a prepayment during the first quarter of 2012and a debt exchange during the fourth quarter of 2012 related to iHeartCommunications’ senior secured credit facilities as discussed elsewhere in thisMD&A.
Other Income (Expense), Net
In connection with the June 2013 exchange offer of a portion of 10.75% Senior Cash Pay Notes due 2016 and 11.00%/11.75% Senior Toggle Notesdue 2016 for newly-issued 14.0% Senior Notes due 2021 and in connection with the senior secured credit facility amendments discussed elsewhere in theManagement’s Discussion and Analysis, all of which were accounted for as modifications of existing debt, we incurred expenses of $23.6 million partiallyoffset by $1.8 million in foreign exchange gains on short-term intercompany accounts.
Other income of $0.3 million for 2012 primarily related to miscellaneous dividend and other income of $3.2 million offset by $3.0 million inforeign exchange losses on short-term intercompany accounts.
Income Tax Benefit
The effective tax rate for the year ended December 31, 2013 was 17.3% compared to 42.8% for the year ended December 31, 2012. The effective taxrate for 2013 was primarily impacted by the $143.5 million valuation allowance recorded during the period as additional deferred tax expense. The valuationallowance was recorded against a portion of the U.S. Federal and State net operating losses due to the uncertainty of the ability to utilize those losses in futureperiods. This expense was partially offset by tax benefits recorded during the period due to the settlement of our U.S. Federal and certain State taxexaminations during the year. Pursuant to the settlements, we recorded a reduction to income tax expense of approximately $20.2 million to reflect the nettax benefits of the settlements.
The effective tax rate for the year ended December 31, 2012 was 42.8% and was favorably impacted by our settlement of U.S. Federal and foreigntax examinations during the year. Pursuant to the settlements, we recorded a reduction to income tax expense of approximately $60.6 million to reflect thenet tax benefits of the settlements. This benefit was partially offset by additional tax recorded during 2012 related to the write-off of deferred tax assetsassociated with the vesting of certain equity awards.
12
iHM Results of Operations
Our iHM operating results were as follows: (In thousands) Year Ended December 31, %
iHM revenue increased $46.8 million during 2013 compared to 2012, primarily due to an increase in national advertising revenue across variousmarkets and advertising categories, including telecommunications, retail, and entertainment, as well as growth in digital advertising revenue as a result ofincreased listenership on our iHeartRadio platform, with total listening hours increasing 29%. Promotional and sponsorship revenues were also higher drivenby events, such as the iHeartRadio Music Festival, Jingle Balls, iHeartRadio Ultimate Pool Party, and album release events. These increases were partiallyoffset by lower political revenues compared to 2012, as well as a decline in our traffic business as a result of integration activities and certain contract losses.
Direct operating expenses increased $64.7 million during 2013 primarily from events, promotional cost, compensation, and higher streaming andperformance royalty expenses during 2013 due to increased listenership on our iHeartRadio platform. In addition, we incurred higher music license fees afterreceiving a one-time $20.7 million credit in 2012 from one of our performance rights organizations. These increases were partially offset by lower costs in ourtraffic business as a result of lower revenues and reduced spending on strategic revenue and cost initiatives. SG&A expenses increased $25.5 millionprimarily on our variable compensation plans, including commissions, as a result of an increase in national and digital revenue. In addition, we also incurredhigher legal fees and research expenses related to sales and programming activities in 2013.
Americas Outdoor Advertising Results of Operations
Our Americas outdoor advertising operating results were as follows: (In thousands) Year Ended December 31, %
Our Americas outdoor revenue increased $18.1 million during 2013 compared to 2012, driven primarily by increases in revenues from bulletins andposters. Traditional bulletins and posters had increases in occupancy and rates in connection with new contracts, while the increase for digital displays wasdriven by higher occupancy and capacity. The increase for digital displays was negatively impacted by lower revenues in our Los Angeles market as a resultof the impact of litigation as discussed further in Item 3 of Part I of this Annual Report on Form 10-K. Partially offsetting these increases were declines inspecialty business revenues due primarily to a significant contract during 2012 that did not recur during 2013, and declines in our airport business drivenprimarily by the loss of certain of our U.S. airport contracts and other airport revenue.
13
Direct operating expenses decreased $15.1 million, primarily due to the benefits resulting from our previous strategic cost initiatives as well asreduced variable costs associated with site lease expenses due to reduced revenues on lower margin products. SG&A expenses decreased $19.2 millionprimarily due to the absence in 2013 of $22.7 million in expenses incurred during 2012 in connection with legal and other costs in Brazil as well as decreasesin 2013 in strategic revenue and cost initiative expenses. This decrease was partially offset by higher legal costs, as well as compensation expenses includingcommissions and amounts related to our variable compensation plans, which were higher for the 2013 period in connection with increasing our revenues.
Depreciation and amortization increased $5.7 million, primarily due to our continued deployment of digital billboards partially offset by assetsbecoming fully depreciated during 2013.
International Outdoor Advertising Results of Operations
Our International outdoor advertising operating results were as follows: (In thousands) Year Ended December 31, %
International outdoor revenue decreased $18.8 million during 2013 compared to 2012, including an increase of $8.6 million from movements inforeign exchange, and the divestiture of our international neon business which had $20.4 million in revenues during 2012. Excluding the impact of foreignexchange and the divestiture, revenues decreased $7.0 million due to lower revenues in Europe as a result of weakened macroeconomic conditions.
Direct operating expenses increased $6.3 million including an increase of $6.4 million from movements in foreign exchange, and the divestiture ofour international neon business during 2012 which had $13.0 million in direct operating expenses during 2012. Excluding the impact of movements inforeign exchange and the divestiture, direct operating expenses increased $12.9 million driven primarily by increases in variable costs in certain marketssuch as China and Norway resulting from increased revenues partially offset by declines in expenses in response to declining revenues in other countries inEurope. SG&A expenses decreased $11.9 million including an increase of $3.1 million from movements in foreign exchange and the divestiture of ourinternational neon business during 2012, which had $4.2 million in SG&A expenses during 2012.
Reconciliation of Segment Operating Income to Consolidated Operating Income (In thousands) Year Ended December 31, 2014 2013 2012 iHM $ 974,031 $ 931,178 $ 974,275 Americas outdoor advertising 307,283 325,520 278,800 International outdoor advertising 106,498 81,846 92,709 Other 32,676 (1,399) 31,024 Impairment charges (24,176) (16,970) (37,651) Other operating income, net 40,031 22,998 48,127 Corporate expense(1) (354,757) (342,391) (317,234)
Consolidated operating income $1,081,586 $1,000,782 $1,070,050 (1) Corporate expenses include expenses related to iHM, Americas outdoor, International outdoor and our Other category, as well as overall executive,
administrative and support functions.
Share-Based Compensation Expense
As of December 31, 2014, there was $22.4 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested share-basedcompensation arrangements that will vest based on service conditions. This cost is expected to be recognized over a weighted average period ofapproximately three years. In addition, as of December 31, 2014, there was $24.7 million of unrecognized compensation cost, net of estimated forfeitures,related to unvested share-based compensation arrangements that will vest based on market, performance and service conditions. This cost will be recognizedwhen it becomes probable that the performance condition will be satisfied.
Share-based compensation expenses are recorded in corporate expenses and were $10.7 million, $16.7 million and $28.5 million for the years endedDecember 31, 2014, 2013 and 2012, respectively.
On October 22, 2012, we granted 1.8 million restricted shares of our Class A common stock (the “Replacement Shares”) in exchange for 2.0 millionstock options granted under the Clear Channel 2008 Executive Incentive Plan pursuant to an option exchange program (the “Program”) that expired onNovember 19, 2012. In addition, on October 22, 2012, we granted 1.5 million fully-vested shares of our Class A common stock (the “Additional Shares”)pursuant to a tax assistance program offered in connection with the Program. Upon the expiration of the Program on November 19, 2012, we repurchased0.9 million of the Additional Shares from the employees who elected to participate in the Program and timely delivered to us a properly completed electionform under Internal Revenue Code Section 83(b) to fund tax withholdings in connection with the Program. Employees who ceased to be eligible, declined toparticipate in the Program or, in the case of the Additional Shares, declined to participate in the tax assistance program, forfeited their Replacement Sharesand Additional Shares on November 19, 2012 and retained their stock options with no changes to the terms. We accounted for the exchange program as amodification of the existing awards under ASC 718 and will recognize incremental compensation expense of approximately $1.7 million over the serviceperiod of the new awards. We recognized $2.6 million of expense related to the Additional Shares granted in connection with the tax assistance program.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following discussion highlights cash flow activities during the years ended December 31, 2014, 2013 and 2012, respectively. (In thousands) Years Ended December 31, 2014 2013 2012 Cash provided by (used for):
Cash provided by operating activities in 2014 was $245.1 million compared to $212.9 million of cash provided in 2013. Our consolidated net lossincluded $877.5 million of non-cash items in 2014. Our consolidated net loss in 2013 included $782.5 million of non-cash items. Non-cash items affectingour net loss include impairment charges, depreciation and amortization, deferred taxes, provision for doubtful accounts, amortization of deferred financingcharges and note discounts, net, share-based compensation, gain on disposal of operating and fixed assets, gain on marketable securities, equity in (earnings)loss of nonconsolidated affiliates, loss on extinguishment of debt, and other reconciling items, net as presented on the face of the consolidated statement ofcash flows. Cash paid for interest was $2.6 million lower in 2014 compared to the prior year due to the timing of accrued interest payments from refinancingtransactions.
2013
Cash provided by operating activities in 2013 was $212.9 million compared to $485.1 million of cash provided in 2012. Our consolidated net lossincluded $782.5 million of non-cash items in 2013. Our consolidated net loss in 2012 included $873.5 million of non-cash items. Non-cash items affectingour net loss include impairment charges, depreciation and amortization, deferred taxes, provision for doubtful accounts, amortization of deferred financingcharges and note discounts, net, share-based compensation, gain on disposal of operating and fixed assets, gain on marketable securities, equity in loss ofnonconsolidated affiliates, loss on extinguishment of debt, and other reconciling items, net as presented on the face of the consolidated statement of cashflows. Cash paid for interest was $162.1 million higher in 2013 compared to the prior year due to the timing of accrued interest with the issuance of CCWH’sSubordinated Notes during the first quarter of 2012 and iHeartCommunications’ 9.0% Priority Guarantee Notes due 2019 during the fourth quarter of 2012.
2012
The $110.2 million increase in cash flows from operations to $485.1 million in 2012 compared to $374.9 million in 2011 was primarily driven bychanges in working capital. Our consolidated net loss in 2012 included $873.5 million of non-cash items. Non-cash items affecting our net loss includeimpairment charges, depreciation and amortization, deferred taxes, provision for doubtful accounts, amortization of deferred financing charges and notediscounts, net, share-based compensation, gain on disposal of operating and fixed assets, loss on marketable securities, equity in earnings of nonconsolidatedaffiliates, loss on extinguishment of debt, and other reconciling items, net as presented on the face of the consolidated statement of cash flows. Cash paid forinterest was $120.6 million higher during 2012 compared to the prior year. Cash provided by operations in 2012 compared to 2011 also reflected lowervariable compensation payments in 2012 associated with our employee incentive programs based on 2011 operating performance compared to suchpayments made in 2011 based on 2010 performance.
15
Investing Activities
2014
Cash used for investing activities of $88.7 million in 2014 primarily reflected capital expenditures of $318.2 million, partially offset by proceeds of$236.6 million primarily from the sale of our 50% interest in ARN and the sale of our 50% interest in Buspak. We spent $50.4 million for capitalexpenditures in our iHM segment primarily related to leasehold improvements and IT infrastructure, $109.7 million in our Americas outdoor segmentprimarily related to the construction of new advertising structures such as digital displays, $117.5 million in our International outdoor segment primarilyrelated to billboard and street furniture advertising structures, $5.7 million in our Other category, and $34.9 million by Corporate primarily related toequipment and software.
2013
Cash used for investing activities of $133.4 million during 2013 reflected our capital expenditures of $324.5 million as well as proceeds from thesale of our shares of Sirius XM Radio, Inc. of $135.6 million. We spent $75.7 million for capital expenditures in our iHM segment primarily related toleasehold improvements, $96.6 million in our Americas outdoor segment primarily related to the construction of new advertising structures such as digitaldisplays, $100.9 million in our International outdoor segment primarily related to new advertising structures such as billboards and street furniture andrenewals of existing contracts, $9.9 million in our Other category related to our national representation business, and $41.3 million by Corporate primarilyrelated to equipment and software. Other cash provided by investing activities were $81.6 million of proceeds from sales of other operating and fixed assets.
2012
Cash used for investing activities of $397.0 million during 2012 reflected capital expenditures of $390.3 million. We spent $65.8 million forcapital expenditures in our iHM segment, $130.8 million in our Americas outdoor segment primarily related to the installation of new digital displays,$137.0 million in our International outdoor segment primarily related to new billboard, street furniture and mall contracts and renewals of existing contracts,$17.4 million in our Other category related to our national representation business, and $39.3 million by Corporate. Partially offsetting cash used forinvesting activities were $59.7 million of proceeds from the divestiture of our international neon business and the sales of other operating assets.
Financing Activities
2014
Cash used for financing activities of $398.0 million in 2014 primarily reflected payments on long-term debt and the payment by CCOH of adividend to CCOH shareholders, partially offset by proceeds from the issuance of long-term debt. iHeartCommunications received cash proceeds from theissuance by CCU Escrow Corporation of 10% Senior Notes due 2018 ($850.0 million in aggregate principal amount), the sale by a subsidiary ofiHeartCommunications of 14% Senior Notes due 2021 to private purchasers ($227.0 million in aggregate principal amount) and the issuance to privatepurchasers of 9% Priority Guarantee Notes due 2022 ($1,000.0 million in aggregate principal amount). This was partially offset by the redemption of $567.1million principal amount outstanding of iHeartCommunications’ 5.5% Senior Notes due 2014 (including $158.5 million principal amount of the notes heldby a subsidiary) and $241.0 million principal amount outstanding of iHeartCommunications’ 4.9% Senior Notes due 2015, the repayment of the full $247.0million principal amount outstanding under iHeartCommunications’ receivables-based credit facility, and the prepayment of $974.9 million aggregateprincipal amount of the Term B facility due 2016 and $16.1 million aggregate principal amount of the Term Loan C facility due 2016. In addition, during2014, CC Finco repurchased $239.0 million aggregate principal amount of notes, for a total purchase price of $222.4 million, including accrued interest.
2013
Cash used for financing activities of $595.9 million in 2013 primarily reflected payments on long-term debt. iHeartCommunications repaid its5.75% senior notes at maturity for $312.1 million (net of $187.9 million principal amount held by and repaid to a subsidiary of iHeartCommunications)using cash on hand. iHeartCommunications prepaid $846.9 million outstanding under its Term Loan A under its senior secured credit facilities using theproceeds from the issuance of iHeartCommunications 11.25% Priority Guarantee Notes, borrowings under its receivables based credit facility, and cash onhand. Other cash used for financing activities included payments to holders of 10.75% Senior Cash Pay Notes due 2016 and 11.00%/11.75% Senior ToggleNotes due 2016 in connection with exchange offers in June 2013 of $32.5 million and in December 2013 of $22.7 million, payment of an applicable highyield discount obligation to holders of 11.00%/11.75% Senior Toggle Notes due 2016 in August 2013 of $25.3 million, payments to repurchasenoncontrolling interests of $61.1 million and $91.9 million in payments for dividends and other payments to noncontrolling interests.
16
2012
Cash used for financing activities of $95.3 million during 2012 primarily reflected (i) the issuance of $2.2 billion of the CCWH Subordinated Notesby CCWH and the use of proceeds distributed to us in connection with a dividend declared by CCOH during 2012, in addition to cash on hand, to repay$2.1 billion of indebtedness under iHeartCommunications’ senior secured credit facilities, (ii) the issuance by CCWH of $2.7 billion aggregate principalamount of the CCWH Senior Notes and the use of the proceeds to fund the tender offer for and redemption of the Existing CCWH Senior Notes, (iii) therepayment of iHeartCommunications’ 5.0% senior notes at maturity for $249.9 million (net of $50.1 million principal amount held by and repaid to asubsidiary of iHeartCommunications with respect to notes repurchased and held by such entity), using a portion of the proceeds from iHeartCommunications’June 2011 issuance of $750.0 million aggregate principal amount of 9.0% Priority Guarantee Notes due 2021, along with available cash on hand and (iv) theexchange of $2.0 billion aggregate principal amount of Term Loans under iHeartCommunications’ senior secured credit facilities for $2.0 billion aggregateprincipal amount of newly issued 9.0% Priority Guarantee Notes due 2019. Our financing activities also reflect a $244.7 million reduction in noncontrollinginterest as a result of the dividend paid by CCOH in connection with the CCWH Subordinated Notes issuance, which represents the portion paid to partiesother than iHeartCommunications’ subsidiaries that own CCOH common stock.
Anticipated Cash Requirements
Our primary source of liquidity is cash on hand, cash flow from operations and borrowing capacity under iHeartCommunications’ domesticreceivables based credit facility, subject to certain limitations contained in iHeartCommunications’ material financing agreements. A significant amount ofour cash requirements are for debt service obligations. We anticipate cash interest requirements of approximately $1.6 billion during 2015. At December 31,2014, we had debt maturities totaling $3.6 million, $1,126.9 million, and $8.2 million in 2015, 2016, and 2017, respectively. It is our policy to permanentlyreinvest the earnings of our non-U.S. subsidiaries as these earnings are generally redeployed in those jurisdictions for operating needs and continuedfunctioning of their businesses. We have the ability and intent to indefinitely reinvest the undistributed earnings of consolidated subsidiaries based outsideof the United States. If any excess cash held by our foreign subsidiaries were needed to fund operations in the United States, we could presently repatriateavailable funds without a requirement to accrue or pay U.S. taxes. This is a result of significant current and historic deficits in our foreign earnings and profits,which gives us flexibility to make future cash distributions as non-taxable returns of capital.
Our ability to fund our working capital, capital expenditures, debt service and other obligations, and to comply with the financial covenants underiHeartCommunications’ financing agreements, depends on our future operating performance and cash from operations and our ability to generate cash fromother liquidity-generating transactions, which are in turn subject to prevailing economic conditions and other factors, many of which are beyond our control.We are currently exploring, and expect to continue to explore, a variety of transactions to provide us with additional liquidity. We cannot assure you that wewill enter into or consummate any such liquidity-generating transactions, or that such transactions will provide sufficient cash to satisfy our liquidity needs,and we cannot currently predict the impact that any such transaction, if consummated, would have on us. If our future operating performance does not meetour expectations or our plans materially change in an adverse manner or prove to be materially inaccurate, we may not be able to refinance the debt ascurrently contemplated. Our ability to refinance the debt will depend on the condition of the capital markets and our financial condition at the time. Therecan be no assurance that refinancing alternatives will be available on terms acceptable to us or at all. Even if refinancing alternatives are available to us, wemay not find them suitable or at comparable interest rates to the indebtedness being refinanced. In addition, the terms of our existing or future debtagreements may restrict us from securing a refinancing on terms that are available to us at that time. If we are unable to obtain sources of refinancing orgenerate sufficient cash through liquidity-generating transactions, we could face substantial liquidity problems, which could have a material adverse effecton our financial condition and on our ability to meet iHeartCommunications’ obligations.
Our financing transactions during 2014 increased our annual interest expense. Our increased interest payment obligations will reduce our liquidityover time, which could in turn reduce our financial flexibility and make us more vulnerable to changes in operating performance and economic downturnsgenerally, and could negatively affect iHeartCommunications’ ability to obtain additional financing in the future.
17
We frequently evaluate strategic opportunities both within and outside our existing lines of business. We expect from time to time to pursueacquisitions or dispositions, which could be material. iHeartCommunications’ and its subsidiaries’ significant amount of indebtedness may limit our abilityto pursue acquisitions. The terms of our existing or future debt agreements may also restrict our ability to engage in these transactions.
Based on our current and anticipated levels of operations and conditions in our markets, we believe that cash on hand, cash flow from operationsand borrowing capacity under iHeartCommunications’ receivables based credit facility will enable us to meet our working capital, capital expenditure, debtservice and other funding requirements for at least the next 12 months. Significant assumptions underlie this belief, including, among other things, that wewill continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity orcapital requirements, and that we will be able to consummate liquidity-generating transactions in a timely manner and on terms acceptable to us. We cannotassure you that this will be the case. If our future cash flows from operations, financing sources and other liquidity-generating transactions are insufficient topay our debt obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures,sell material assets, seek additional capital or refinance iHeartCommunications’ and its subsidiaries’ debt. We cannot assure you that we would be able toaccomplish any of these alternatives on a timely basis or on satisfactory terms, if at all.
We were in compliance with the covenants contained in iHeartCommunications’ material financing agreements as of December 31, 2014, includingthe maximum consolidated senior secured net debt to consolidated EBITDA limitation contained in iHeartCommunications’ senior secured credit facilities.We believe our long-term plans, which include promoting spending by advertisers in our industries and capitalizing on our diverse geographic and productopportunities, including the continued investment in our media and entertainment initiatives and continued deployment of digital displays, will enable us tocontinue generating cash flows from operations sufficient to meet our liquidity and funding requirements long term. However, our anticipated results aresubject to significant uncertainty and there can be no assurance that we will be able to maintain compliance with these covenants. In addition, our ability tocomply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach ofany covenants set forth in iHeartCommunications’ financing agreements would result in a default thereunder. An event of default would permit the lendersunder a defaulted financing agreement to declare all indebtedness thereunder to be due and payable prior to maturity. Moreover, the lenders under thereceivables based credit facility under iHeartCommunications’ senior secured credit facilities would have the option to terminate their commitments to makefurther extensions of credit thereunder. If we are unable to repay iHeartCommunications’ obligations under any secured credit facility, the lenders couldproceed against any assets that were pledged to secure such facility. In addition, a default or acceleration under any of iHeartCommunications’ materialfinancing agreements could cause a default under other of our obligations that are subject to cross-default and cross-acceleration provisions. The thresholdamount for a cross-default under the senior secured credit facilities is $100.0 million.
Sources of Capital
As of December 31, 2014 and 2013, we had the following debt outstanding, net of cash and cash equivalents: December 31, (In millions) 2014 2013 Senior Secured Credit Facilities:
Term Loan B Facility Due 2016 916.1 1,891.0 Term Loan C Asset Sale Facility Due 2016 15.2 34.8 Term Loan D Facility Due 2019 5,000.0 5,000.0 Term Loan E Facility Due 2019 1,300.0 1,300.0
Receivables Based Credit Facility Due 2017(1) — 247.0 9.0% Priority Guarantee Notes Due 2019 1,999.8 1,999.8 9.0% Priority Guarantee Notes Due 2021 1,750.0 1,750.0 11.25% Priority Guarantee Notes Due 2021 575.0 575.0 9.0% Priority Guarantee Notes Due 2022 1,000.0 — Subsidiary Senior Revolving Credit Facility Due 2018 — — Other Secured Subsidiary Debt 19.2 21.1
Total Secured Debt 12,575.3 12,818.7
18
December 31, (In millions) 2014 2013 10.75% Senior Cash Pay Notes Due 2016 — 94.3 11.00%/11.75% Senior Toggle Notes Due 2016 — 127.9 14.0% Senior Notes Due 2021 1,661.6 1,404.2 Legacy Notes:
5.5% Senior Notes Due 2014 — 461.5 4.9% Senior Notes Due 2015 — 250.0 5.5% Senior Notes Due 2016 192.9 250.0 6.875% Senior Notes Due 2018 175.0 175.0 7.25% Senior Notes Due 2027 300.0 300.0
10.0% Senior Notes Due 2018 730.0 — Subsidiary Senior Notes:
6.5% Series A Senior Notes Due 2022 735.8 735.8 6.5% Series B Senior Notes Due 2022 1,989.3 1,989.3
Subsidiary Senior Subordinated Notes: 7.625% Series A Senior Notes Due 2020 275.0 275.0 7.625% Series B Senior Notes Due 2020 1,925.0 1,925.0
Other Subsidiary Debt 1.0 — Purchase accounting adjustments and original issue discount (234.9) (322.4)
Total Debt 20,326.0 20,484.3 Less: Cash and cash equivalents 457.0 708.2
$ 19,869.0 $ 19,776.1 (1) The receivables based credit facility provides for borrowings of up to the lesser of $535.0 million (the revolving credit commitment) or the borrowing
base amount, as defined under the receivables based facility, subject to certain limitations contained in our material financing agreements.
Our subsidiaries have from time to time repurchased certain debt obligations of iHeartCommunications and our outstanding equity securities andoutstanding equity securities of CCOH, and may in the future, as part of various financing and investment strategies, purchase additional outstandingindebtedness of iHeartCommunications or its subsidiaries or our outstanding equity securities or outstanding equity securities of CCOH, in tender offers,open market purchases, privately negotiated transactions or otherwise. We or our subsidiaries may also sell certain assets, securities, or properties. Thesepurchases or sales, if any, could have a material positive or negative impact on our cash available to repay outstanding debt obligations or on ourconsolidated results of operations. These transactions could also require or result in amendments to the agreements governing outstanding debt obligationsor changes in our leverage or other financial ratios, which could have a material positive or negative impact on our ability to comply with the covenantscontained in iHeartCommunications’ debt agreements. These transactions, if any, will depend on prevailing market conditions, our liquidity requirements,contractual restrictions and other factors. The amounts involved may be material.
Senior Secured Credit Facilities
As of December 31, 2014, iHeartCommunications had a total of $7,231.2 million outstanding under its senior secured credit facilities, consisting of:
• a $916.1 million Term Loan B, which matures on January 29, 2016; and
• a $15.2 million Term Loan C, which matures on January 29, 2016; and
• a $5.0 billion Term Loan D, which matures on January 30, 2019; and
• a $1.3 billion Term Loan E, which matures on July 30, 2019.
19
iHeartCommunications may raise incremental Term Loans of up to (a) $1.5 billion, plus (b) the excess, if any, of (x) 0.65 times pro formaconsolidated EBITDA (as calculated in the manner provided in the senior secured credit facilities documentation), over (y) $1.5 billion, plus (c) the aggregateamount of certain principal prepayments made in respect of the Term Loans under the senior secured credit facilities. Availability of such incremental TermLoans is subject, among other things, to the absence of any default, pro forma compliance with the financial covenant and the receipt of commitments byexisting or additional financial institutions.
iHeartCommunications is the primary borrower under the senior secured credit facilities, except that certain of its domestic restricted subsidiaries areco-borrowers under a portion of the Term Loan facilities.
Interest Rate and Fees
Borrowings under iHeartCommunications’ senior secured credit facilities bear interest at a rate equal to an applicable margin plus, atiHeartCommunications’ option, either (i) a base rate determined by reference to the higher of (A) the prime lending rate publicly announced by theadministrative agent or (B) the Federal funds effective rate from time to time plus 0.50%, or (ii) a Eurocurrency rate determined by reference to the costs offunds for deposits for the interest period relevant to such borrowing adjusted for certain additional costs.
The margin percentages applicable to the Term Loan facilities are the following percentages per annum:
• with respect to loans under the Term Loan B and Term Loan C asset sale facility, (i) 2.65% in the case of base rate loans and (ii) 3.65% inthe case of Eurocurrency rate loans; and
• with respect to loans under the Term Loan D, (i) 5.75% in the case of base rate loans and (ii) 6.75% in the case of Eurocurrency rate loans;and
• with respect to loans under the Term Loan E, (i) 6.50% in the case of base rate loans and (ii) 7.50% in the case of Eurocurrency rate loans.
The margin percentages are subject to adjustment based upon iHeartCommunications’ leverage ratio.
Prepayments
The senior secured credit facilities require iHeartCommunications to prepay outstanding Term Loans, subject to certain exceptions, with:
• 50% (which percentage may be reduced to 25% and to 0% based upon iHeartCommunications’ leverage ratio) of
iHeartCommunications’ annual excess cash flow (as calculated in accordance with the senior secured credit facilities), less any voluntaryprepayments of Term Loans and subject to customary credits;
• 100% of the net cash proceeds of sales or other dispositions of specified assets being marketed for sale (including casualty andcondemnation events), subject to certain exceptions;
• 100% (which percentage may be reduced to 75% and 50% based upon iHeartCommunications’ leverage ratio) of the net cash proceeds of
sales or other dispositions by iHeartCommunications or its wholly-owned restricted subsidiaries of assets other than specified assetsbeing marketed for sale, subject to reinvestment rights and certain other exceptions;
• 100% of the net cash proceeds of (i) any incurrence of certain debt, other than debt permitted under iHeartCommunications’ seniorsecured credit facilities, (ii) certain securitization financing, (iii) certain issuances of Permitted Additional Notes (as defined in the seniorsecured credit facilities) and (iv) certain issuances of Permitted Unsecured Notes and Permitted Senior Secured Notes (as defined in thesenior secured credit facilities); and
• Net cash proceeds received by iHeartCommunications as dividends or distributions from indebtedness incurred at CCOH provided thatthe Consolidated Leverage Ratio of CCOH is no greater than 7.00 to 1.00.
The foregoing prepayments with the net cash proceeds of any incurrence of certain debt, other than debt permitted under iHeartCommunications’senior secured credit facilities, certain securitization financing, issuances of Permitted Additional Notes and annual excess cash flow will be applied, atiHeartCommunications’ option, to the Term Loans (on a pro rata basis, other than that non-extended classes of Term Loans may be prepaid prior to anycorresponding extended class), in each case (i) first to the Term Loans outstanding under Term Loan B and (ii) one of (w) second, to outstanding Term Loan Casset sale facility loans; third, to outstanding Term Loan D; and fourth, to outstanding Term Loan E, or (x) second, to outstanding Term Loan C asset salefacility loans; third, to outstanding Term Loan E; and fourth, to outstanding Term Loan D, or (y) second, to outstanding Term Loan C asset sale facility loans;and third, ratably to outstanding Term Loan D and Term Loan E, or (z) second, ratably to outstanding Term Loan C asset sale facility loans, Term Loan D andTerm Loan E. In each case to the remaining installments thereof in direct order of maturity for the Term Loan C asset sale facility loans.
20
The foregoing prepayments with net cash proceeds of sales or other dispositions by iHeartCommunications or its wholly-owned restrictedsubsidiaries of assets other than specified assets being marketed for sale, subject to reinvestment rights and certain other exceptions, will be applied (i) first tothe Term Loan C asset sale facility loans in direct order of maturity and (ii) one of (w) second, to outstanding Term Loan B; third, to outstanding TermLoan D; and fourth, to outstanding Term Loan E, or (x) second, to outstanding Term Loan B; third, to outstanding Term Loan E; and fourth, to outstandingTerm Loan D, or (y) second, to outstanding Term Loan B; and third, ratably to outstanding Term Loan D and Term Loan E, or (z) second, ratably tooutstanding Term Loan B, Term Loan D and Term Loan E.
The foregoing prepayments with net cash proceeds of issuances of Permitted Unsecured Notes and Permitted Senior Secured Notes and Net CashProceeds received by iHeartCommunications as a distribution from indebtedness incurred by CCOH will be applied (i) first, ratably to outstanding Term LoanB and Term Loan C in direct order of maturity, second, to the outstanding Term Loan D and, third, to outstanding Term Loan E, (ii) first, ratably tooutstanding Term Loan B and Term Loan C in direct order of maturity, second, to the outstanding Term Loan E and, third, to outstanding Term Loan D,(iii) first, ratably to outstanding Term Loan B and Term Loan C in direct order of maturity and, second, ratably to outstanding Term Loan D and Term Loan Eor (iv) ratably to outstanding Term Loan B, Term Loan C, Term Loan D and Term Loan E.
iHeartCommunications may voluntarily repay outstanding loans under the senior secured credit facilities at any time without premium or penalty,other than customary “breakage” costs with respect to Eurocurrency rate loans.
Amendments
On October 25, 2012, iHeartCommunications amended the terms of its senior secured credit facilities (the “Amendments”). The Amendments,among other things: (i) permit exchange offers of Term Loans for new debt securities in an aggregate principal amount of up to $5.0 billion (including the$2.0 billion of 9.0% priority guarantee notes due 2019 issued in October 2012 as described under “—Sources of Capital—Refinancing Transactions” below);(ii) provide iHeartCommunications with greater flexibility to prepay tranche A Term Loans; (iii) following the repayment or extension of all tranche A TermLoans, permit below par non-pro rata purchases of Term Loans pursuant to customary Dutch auction procedures whereby all lenders of the class of TermLoans offered to be purchased will be offered an opportunity to participate; (iv) following the repayment or extension of all tranche A Term Loans, permit therepurchase of junior debt maturing before January 2016 with cash on hand in an amount not to exceed $200.0 million; (v) combine the Term Loan B, thedelayed draw Term Loan 1 and the delayed draw Term Loan 2 under the senior secured credit facilities; (vi) preserve revolving credit facility capacity in theevent iHeartCommunications repays all amounts outstanding under the revolving credit facility; and (vii) eliminate certain restrictions on the ability ofCCOH and its subsidiaries to incur debt. On October 31, 2012, iHeartCommunications repaid and permanently cancelled the commitments under ourrevolving credit facility, which was set to mature in July 2014.
On February 28, 2013, iHeartCommunications repaid all $846.9 million of loans outstanding under its Term Loan A facility.
On May 31, 2013, iHeartCommunications further amended the terms of its senior secured credit facilities by extending a portion of Term Loan Band Term Loan C loans due 2016 through the creation of a new $5.0 billion Term Loan D due January 30, 2019. The amendment also permittediHeartCommunications to make applicable high yield discount obligation catch-up payments beginning after May 2018 with respect to the new TermLoan D and beginning in June 2018 with respect to the 14.0% Senior Notes due 2021, which were issued in connection with the exchange of a portion of theSenior Cash Pay Notes and Senior Toggle Notes.
In connection with the December 2013 refinancing discussed later, iHeartCommunications further amended the terms of our senior secured creditfacilities on December 18, 2013, to extend a portion of the Term Loan B and Term Loan C due 2016 through the creation of a new $1.3 billion Term Loan Edue July 30, 2019.
Collateral and Guarantees
The senior secured credit facilities are guaranteed by iHeartCommunications and each of its existing and future material wholly-owned domesticrestricted subsidiaries, subject to certain exceptions.
21
All obligations under the senior secured credit facilities, and the guarantees of those obligations, are secured, subject to permitted liens, includingprior liens permitted by the indenture governing the iHeartCommunications senior notes, and other exceptions, by:
• a lien on the capital stock of iHeartCommunications;
• 100% of the capital stock of any future material wholly-owned domestic license subsidiary that is not a “Restricted Subsidiary” under theindenture governing the iHeartCommunications senior notes;
• certain assets that do not constitute “principal property” (as defined in the indenture governing the iHeartCommunications senior notes);
• certain specified assets of iHeartCommunications and the guarantors that constitute “principal property” (as defined in the indenturegoverning the iHeartCommunications senior notes) securing obligations under the senior secured credit facilities up to the maximumamount permitted to be secured by such assets without requiring equal and ratable security under the indenture governing theiHeartCommunications senior notes; and
• a lien on the accounts receivable and related assets securing iHeartCommunications’ receivables based credit facility that is junior to thelien securing iHeartCommunications’ obligations under such credit facility.
Certain Covenants and Events of Default
The senior secured credit facilities require iHeartCommunications to comply on a quarterly basis with a financial covenant limiting the ratio ofconsolidated secured debt, net of cash and cash equivalents, to consolidated EBITDA (as defined by iHeartCommunications’ senior secured credit facilities)for the preceding four quarters. iHeartCommunications’ secured debt consists of the senior secured credit facilities, the receivables-based credit facility, thepriority guarantee notes and certain other secured subsidiary debt. As required by the definition of consolidated EBITDA in iHeartCommunications’ seniorsecured credit facilities, iHeartCommunications’ consolidated EBITDA for the preceding four quarters of $1.9 billion is calculated as operating income (loss)before depreciation, amortization, impairment charges and other operating income (expense), net plus share-based compensation and is further adjusted forthe following items: (i) costs incurred in connection with the closure and/or consolidation of facilities, retention charges, consulting fees and other permittedactivities; (ii) extraordinary, non-recurring or unusual gains or losses or expenses and severance; (iii) non-cash charges; (iv) cash received fromnonconsolidated affiliates; and (v) various other items.
The following table reflects a reconciliation of consolidated EBITDA (as defined by iHeartCommunications’ senior secured credit facilities) tooperating income and net cash provided by operating activities for the four quarters ended December 31, 2014:
(In Millions) Four Quarters Ended
December 31, 2014 Consolidated EBITDA (as defined by iHeartCommunications’ senior secured credit facilities) $ 1,942.2 Less adjustments to consolidated EBITDA (as defined by iHeartCommunications’ senior secured credit facilities):
Costs incurred in connection with the closure and/or consolidation of facilities, retention charges, consulting fees, and other permittedactivities 75.7
Extraordinary, non-recurring or unusual gains or losses or expenses and severance (as referenced in the definition of consolidatedEBITDA in iHeartCommunications’ senior secured credit facilities) 31.6
Non-cash charges (35.8) Cash received from nonconsolidated affiliates (1.2) Other items (10.5)
Less: Depreciation and amortization, Impairment charges, Gain (loss) on disposal of operating and fixed assets and Share-basedcompensation expense (705.8)
Operating income 1,081.6 Plus: Depreciation and amortization, Impairment charges, Other operating income (expense), net, and Share-based compensation expense 701.3 Less: Interest expense (1,741.6) Less: Current income tax expense (24.6) Plus: Other income (expense), net 9.1 Adjustments to reconcile consolidated net loss to net cash provided by operating activities (including Provision for doubtful accounts,
Amortization of deferred financing charges and note discounts, net and Other reconciling items, net) 89.6 Change in assets and liabilities, net of assets acquired and liabilities assumed 129.7 Net cash provided by operating activities $ 245.1
22
The maximum ratio under this financial covenant was 8.75 to 1 for the four quarters ended December 31, 2014. At December 31, 2014, the ratio was6.3 to 1.
In addition, the senior secured credit facilities include negative covenants that, subject to significant exceptions, limit iHeartCommunications’ability and the ability of its restricted subsidiaries to, among other things:
• incur additional indebtedness;
• create liens on assets;
• engage in mergers, consolidations, liquidations and dissolutions;
• sell assets;
• pay dividends and distributions or repurchase iHeartCommunications’ capital stock;
• make investments, loans, or advances;
• prepay certain junior indebtedness;
• engage in certain transactions with affiliates;
• amend material agreements governing certain junior indebtedness; and
• change lines of business.
The senior secured credit facilities include certain customary representations and warranties, affirmative covenants and events of default, includingpayment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certainevents under ERISA, material judgments, the invalidity of material provisions of the senior secured credit facilities documentation, the failure of collateralunder the security documents for the senior secured credit facilities, the failure of the senior secured credit facilities to be senior debt under the subordinationprovisions of certain of iHeartCommunications’ subordinated debt and a change of control. If an event of default occurs, the lenders under the senior securedcredit facilities will be entitled to take various actions, including the acceleration of all amounts due under the senior secured credit facilities and all actionspermitted to be taken by a secured creditor.
Receivables Based Credit Facility
As of December 31, 2014, there were no borrowings outstanding under iHeartCommunications’ receivables based credit facility.
The receivables based credit facility provides revolving credit commitments of $535.0 million, subject to a borrowing base. The borrowing base atany time equals 90% of the eligible accounts receivable of iHeartCommunications and certain of its subsidiaries. The receivables based credit facilityincludes a letter of credit sub-facility and a swingline loan sub-facility.
iHeartCommunications and certain subsidiary borrowers are the borrowers under the receivables based credit facility. iHeartCommunications hasthe ability to designate one or more of its restricted subsidiaries as borrowers under the receivables based credit facility. The receivables based credit facilityloans are available in U.S. dollars and letters of credit are available in a variety of currencies including U.S. dollars, Euros, Pounds Sterling, and Canadiandollars.
Interest Rate and Fees
Borrowings under the receivables based credit facility bear interest at a rate per annum equal to an applicable margin plus, atiHeartCommunications’ option, either (i) a base rate determined by reference to the highest of (a) the prime rate of Citibank, N.A. and (b) the Federal Fundsrate plus 0.50% or (ii) a Eurocurrency rate determined by reference to the rate (adjusted for statutory reserve requirements for Eurocurrency liabilities) forEurodollar deposits for the interest period relevant to such borrowing. The applicable margin for borrowings under the receivables based credit facility rangesfrom 1.50% to 2.00% for Eurocurrency borrowings and from 0.50% to 1.00% for base-rate borrowings, depending on average daily excess availability underthe receivables based credit facility during the prior fiscal quarter.
In addition to paying interest on outstanding principal under the receivables based credit facility, iHeartCommunications is required to pay acommitment fee to the lenders under the receivables based credit facility in respect of the unutilized commitments thereunder. The commitment fee rateranges from 0.25% to 0.375% per annum dependent upon average unused commitments during the prior quarter. iHeartCommunications must also paycustomary letter of credit fees.
23
Maturity
Borrowings under the receivables based credit facility will mature, and lending commitments thereunder will terminate, on the fifth anniversary ofthe effectiveness of the receivables based credit facility (December 24, 2017), provided that, (a) the maturity date will be October 31, 2015 if on October 30,2015, greater than $500.0 million in aggregate principal amount is owing under certain of iHeartCommunications’ Term Loan credit facilities, (b) thematurity date will be May 3, 2016 if on May 2, 2016 greater than $500.0 million aggregate principal amount of iHeartCommunications’ 10.75% senior cashpay notes due 2016 and 11.00%/11.75% senior toggle notes due 2016 are outstanding and (c) in the case of any debt under clauses (a) and (b) that isamended or refinanced in any manner that extends the maturity date of such debt to a date that is on or before the date that is five years after the effectivenessof the receivables based credit facility, the maturity date will be one day prior to the maturity date of such debt after giving effect to such amendment orrefinancing if greater than $500,000,000 in aggregate principal amount of such debt is outstanding.
Prepayments
If at any time the sum of the outstanding amounts under the receivables based credit facility exceeds the lesser of (i) the borrowing base and (ii) theaggregate commitments under the facility, iHeartCommunications will be required to repay outstanding loans and cash collateralize letters of credit in anaggregate amount equal to such excess. iHeartCommunications may voluntarily repay outstanding loans under the receivables based credit facility at anytime without premium or penalty, other than customary “breakage” costs with respect to Eurocurrency rate loans. Any voluntary prepaymentsiHeartCommunications makes will not reduce its commitments under the receivables based credit facility.
Guarantees and Security
The facility is guaranteed by, subject to certain exceptions, the guarantors of iHeartCommunications’ senior secured credit facilities. All obligationsunder the receivables based credit facility, and the guarantees of those obligations, are secured by a perfected security interest in all ofiHeartCommunications’ and all of the guarantors’ accounts receivable and related assets and proceeds thereof that is senior to the security interest ofiHeartCommunications’ senior secured credit facilities in such accounts receivable and related assets and proceeds thereof, subject to permitted liens,including prior liens permitted by the indenture governing certain of iHeartCommunications’ senior notes (the “Legacy Notes”), and certain exceptions.
Certain Covenants and Events of Default
If borrowing availability is less than the greater of (a) $50.0 million and (b) 10% of the aggregate commitments under the receivables based creditfacility, in each case, for five consecutive business days (a “Liquidity Event”), iHeartCommunications will be required to comply with a minimum fixedcharge coverage ratio of at least 1.00 to 1.00 for fiscal quarters ending on or after the occurrence of the Liquidity Event, and will be continued to comply withthis minimum fixed charge coverage ratio until borrowing availability exceeds the greater of (x) $50.0 million and (y) 10% of the aggregate commitmentsunder the receivables based credit facility, in each case, for 30 consecutive calendar days, at which time the Liquidity Event shall no longer be deemed to beoccurring. In addition, the receivables based credit facility includes negative covenants that, subject to significant exceptions, limit iHeartCommunications’ability and the ability of its restricted subsidiaries to, among other things:
• incur additional indebtedness;
• create liens on assets;
• engage in mergers, consolidations, liquidations and dissolutions;
• sell assets;
• pay dividends and distributions or repurchase capital stock;
• make investments, loans, or advances;
• prepay certain junior indebtedness;
• engage in certain transactions with affiliates;
• amend material agreements governing certain junior indebtedness; and
• change lines of business.
24
The receivables based credit facility includes certain customary representations and warranties, affirmative covenants and events of default,including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy,certain events under ERISA, material judgments and a change of control. If an event of default occurs, the lenders under the receivables based credit facilitywill be entitled to take various actions, including the acceleration of all amounts due under iHeartCommunications’ receivables based credit facility and allactions permitted to be taken by a secured creditor.
9% Priority Guarantee Notes Due 2019
As of December 31, 2014, iHeartCommunications had outstanding $2.0 billion aggregate principal amount of 9.0% priority guarantee notes due2019 (the “Priority Guarantee Notes due 2019”).
The Priority Guarantee Notes due 2019 mature on December 15, 2019 and bear interest at a rate of 9.0% per annum, payable semi-annually in arrearson June 15 and December 15 of each year, which began on June 15, 2013. The Priority Guarantee Notes due 2019 are iHeartCommunications’ seniorobligations and are fully and unconditionally guaranteed, jointly and severally, on a senior basis by the guarantors named in the indenture. The PriorityGuarantee Notes due 2019 and the guarantors’ obligations under the guarantees are secured by (i) a lien on (a) the capital stock of iHeartCommunications and(b) certain property and related assets that do not constitute “principal property” (as defined in the indenture governing certain of iHeartCommunications’Legacy Notes), in each case equal in priority to the liens securing the obligations under iHeartCommunications’ senior secured credit facilities and ourpriority guarantee notes due 2021 and 2022, subject to certain exceptions, and (ii) a lien on the accounts receivable and related assets securingiHeartCommunications’ receivables based credit facility junior in priority to the lien securing iHeartCommunications’ obligations thereunder, subject tocertain exceptions. In addition to the collateral granted to secure the Priority Guarantee Notes due 2019, the collateral agent and the trustee for the PriorityGuarantee Notes due 2019 entered into an agreement with the administrative agent for the lenders under the senior secured credit facilities to turn over to thetrustee under the Priority Guarantee Notes due 2019, for the benefit of the holders of the Priority Guarantee Notes due 2019, a pro rata share of any recoveryreceived on account of the principal properties, subject to certain terms and conditions.
iHeartCommunications may redeem the Priority Guarantee Notes due 2019 at its option, in whole or part, at any time prior to July 15, 2015, at aprice equal to 100% of the principal amount of the Priority Guarantee Notes due 2019 redeemed, plus accrued and unpaid interest to the redemption date andplus an applicable premium. iHeartCommunications may redeem the Priority Guarantee Notes due 2019, in whole or in part, on or after July 15, 2015, at theredemption prices set forth in the indenture plus accrued and unpaid interest to the redemption date. Prior to July 15, 2015, iHeartCommunications may electto redeem up to 40% of the aggregate principal amount of the Priority Guarantee Notes due 2019 at a redemption price equal to 109.0% of the principalamount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equity offerings.
The indenture governing the Priority Guarantee Notes due 2019 contains covenants that limit iHeartCommunications’ ability and the ability of itsrestricted subsidiaries to, among other things: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issuecertain preferred stock; (iii) modify any of iHeartCommunications’ existing senior notes; (iv) transfer or sell assets; (v) engage in certain transactions withaffiliates; (vi) create restrictions on dividends or other payments by the restricted subsidiaries; and (vii) merge, consolidate or sell substantially all ofiHeartCommunications’ assets. The indenture contains covenants that limit iHeartMedia Capital I, LLC’s ability, iHeartCommunications’ ability and theability of its restricted subsidiaries to, among other things: (i) create liens on assets and (ii) materially impair the value of the security interests taken withrespect to the collateral for the benefit of the notes collateral agent and the holders of the Priority Guarantee Notes due 2019. The indenture also provides forcustomary events of default.
9% Priority Guarantee Notes Due 2021
As of December 31, 2014, iHeartCommunications had outstanding $1.75 billion aggregate principal amount of 9.0% priority guarantee notes due2021 (the “Priority Guarantee Notes due 2021”).
The Priority Guarantee Notes due 2021 mature on March 1, 2021 and bear interest at a rate of 9.0% per annum, payable semi-annually in arrears onMarch 1 and September 1 of each year, which began on September 1, 2011. The Priority Guarantee Notes due 2021 are iHeartCommunications’ seniorobligations and are fully and unconditionally guaranteed, jointly and severally, on a senior basis by the guarantors named in the indenture. The PriorityGuarantee Notes due 2021 and the guarantors’ obligations under the guarantees are secured by (i) a lien on (a) the capital stock of iHeartCommunications and(b) certain property and related assets that do not constitute “principal property” (as defined in the indenture governing certain Legacy Notes ofiHeartCommunications), in each case equal in priority to the liens securing the obligations under iHeartCommunications’ senior secured credit facilities, thePriority Guarantee Notes due 2019, the 11.25% Priority Guarantee Notes and the Priority Guarantee Notes due 2022, subject to certain exceptions, and (ii) alien on the accounts receivable and related assets securing iHeartCommunications’ receivables based credit facility junior in priority to the lien securingiHeartCommunications’ obligations thereunder, subject to certain exceptions.
25
iHeartCommunications may redeem the Priority Guarantee Notes due 2021 at its option, in whole or part, at any time prior to March 1, 2016, at aprice equal to 100% of the principal amount of the Priority Guarantee Notes due 2021 redeemed, plus accrued and unpaid interest to the redemption date andplus an applicable premium. iHeartCommunications may redeem the Priority Guarantee Notes due 2021, in whole or in part, on or after March 1, 2016, at theredemption prices set forth in the indenture plus accrued and unpaid interest to the redemption date. At any time on or before March 1, 2014,iHeartCommunications may elect to redeem up to 40% of the aggregate principal amount of the Priority Guarantee Notes due 2021 at a redemption priceequal to 109.0% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equityofferings.
The indenture governing the Priority Guarantee Notes due 2021 contains covenants that limit iHeartCommunications’ ability and the ability of itsrestricted subsidiaries to, among other things: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issuecertain preferred stock; (iii) modify any of iHeartCommunications’ existing senior notes; (iv) transfer or sell assets; (v) engage in certain transactions withaffiliates; (vi) create restrictions on dividends or other payments by the restricted subsidiaries; and (vii) merge, consolidate or sell substantially all ofiHeartCommunications’ assets. The indenture contains covenants that limit iHeartMedia Capital I, LLC’s ability, iHeartCommunications’ ability and theability of its restricted subsidiaries to, among other things: (i) create liens on assets and (ii) materially impair the value of the security interests taken withrespect to the collateral for the benefit of the notes collateral agent and the holders of the Priority Guarantee Notes due 2021. The indenture also provides forcustomary events of default.
11.25% Priority Guarantee Notes Due 2021
As of December 31, 2014, iHeartCommunications had outstanding $575.0 million aggregate principal amount of 11.25% Priority Guarantee Notesdue 2021 (the “11.25% Priority Guarantee Notes”).
The 11.25% Priority Guarantee Notes mature on March 1, 2021 and bear interest at a rate of 11.25% per annum, payable semi-annually on March 1and September 1 of each year, which began on September 1, 2013. The 11.25% Priority Guarantee Notes are iHeartCommunications’ senior obligations andare fully and unconditionally guaranteed, jointly and severally, on a senior basis by the guarantors named in the indenture governing such notes. The11.25% Priority Guarantee Notes and the guarantors’ obligations under the guarantees are secured by (i) a lien on (a) the capital stock ofiHeartCommunications and (b) certain property and related assets that do not constitute “principal property” (as defined in the indenture governing certainLegacy Notes of iHeartCommunications), in each case equal in priority to the liens securing the obligations under iHeartCommunications’ senior securedcredit facilities, iHeartCommunications’ Priority Guarantee Notes due 2019, our Priority Guarantee Notes due 2021 and iHeartCommunications’ PriorityGuarantee Notes due 2022, subject to certain exceptions, and (ii) a lien on the accounts receivable and related assets securing iHeartCommunications’receivables based credit facility junior in priority to the lien securing iHeartCommunications’ obligations thereunder, subject to certain exceptions.
iHeartCommunications may redeem the 11.25% Priority Guarantee Notes at its option, in whole or part, at any time prior to March 1, 2016, at aprice equal to 100% of the principal amount of the 11.25% Priority Guarantee Notes redeemed, plus accrued and unpaid interest to the redemption date andplus an applicable premium. In addition, until March 1, 2016, iHeartCommunications may elect to redeem up to 40% of the aggregate principal amount ofthe 11.25% Priority Guarantee Notes at a redemption price equal to 111.25% of the principal amount thereof, plus accrued and unpaid interest to theredemption date, with the net proceeds of one or more equity offerings. iHeartCommunications may redeem the 11.25% Priority Guarantee Notes, in whole orin part, on or after March 1, 2016, at the redemption prices set forth in the indenture plus accrued and unpaid interest to the redemption date.
The indenture governing the 11.25% Priority Guarantee Notes contains covenants that limit iHeartCommunications’ ability and the ability of itsrestricted subsidiaries to, among other things: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issuecertain preferred stock; (iii) modify any of iHeartCommunications’ existing senior notes; (iv) transfer or sell assets; (v) engage in certain transactions withaffiliates; (vi) create restrictions on dividends or other payments by the restricted subsidiaries; and (vii) merge, consolidate or sell substantially all ofiHeartCommunications’ assets. The indenture contains covenants that limit iHeartMedia Capital I, LLC’s ability, iHeartCommunications’ ability and theability of its restricted subsidiaries to, among other things: (i) create liens on assets and (ii) materially impair the value of the security interests taken withrespect to the collateral for the benefit of the notes collateral agent and the holders of the 11.25% Priority Guarantee Notes. The indenture also provides forcustomary events of default.
9% Priority Guarantee Notes Due 2022
As of December 31, 2014, iHeartCommunications had outstanding $1.0 billion aggregate principal amount of 9.0% priority guarantee notes due2022 (the “Priority Guarantee Notes due 2022”).
26
The Priority Guarantee Notes due 2022 mature on September 15, 2022 and bear interest at a rate of 9.0% per annum, payable semi-annually inarrears on March 15 and September 15 of each year, which begins on March 15, 2015. The Priority Guarantee Notes due 2022 are iHeartCommunications’senior obligations and are fully and unconditionally guaranteed, jointly and severally, on a senior basis by the guarantors named in the indenture. ThePriority Guarantee Notes due 2022 and the guarantors’ obligations under the guarantees are secured by (i) a lien on (a) the capital stock ofiHeartCommunications and (b) certain property and related assets that do not constitute “principal property” (as defined in the indenture governing certain ofiHeartCommunications’ Legacy Notes), in each case equal in priority to the liens securing the obligations under iHeartCommunications’ senior securedcredit facilities, the Priority Guarantee Notes due 2019, the Priority Guarantee Notes due 2021 and the 11.25% Priority Guarantee Notes, subject to certainexceptions, and (ii) a lien on the accounts receivable and related assets securing iHeartCommunications’ receivables based credit facility junior in priority tothe lien securing iHeartCommunications’ obligations thereunder, subject to certain exceptions.
iHeartCommunications may redeem the Priority Guarantee Notes due 2022 at its option, in whole or part, at any time prior to September 15, 2017, ata price equal to 100% of the principal amount of the Priority Guarantee Notes due 2022 redeemed, plus accrued and unpaid interest to the redemption dateand plus an applicable premium. iHeartCommunications may redeem the Priority Guarantee Notes due 2022, in whole or in part, on or after September 15,2017, at the redemption prices set forth in the indenture plus accrued and unpaid interest to the redemption date. At any time on or before September 15,2017, iHeartCommunications may elect to redeem up to 40% of the aggregate principal amount of the Priority Guarantee Notes due 2022 at a redemptionprice equal to 109.0% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equityofferings.
The indenture governing the Priority Guarantee Notes due 2022 contains covenants that limit iHeartCommunications’ ability and the ability of itsrestricted subsidiaries to, among other things: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issuecertain preferred stock; (iii) modify any of iHeartCommunications’ existing senior notes; (iv) transfer or sell assets; (v) engage in certain transactions withaffiliates; (vi) create restrictions on dividends or other payments by the restricted subsidiaries; and (vii) merge, consolidate or sell substantially all ofiHeartCommunications’ assets. The indenture contains covenants that limit iHeartMedia Capital I, LLC’s ability, iHeartCommunications’ ability and theability of its restricted subsidiaries to, among other things: (i) create liens on assets and (ii) materially impair the value of the security interests taken withrespect to the collateral for the benefit of the notes collateral agent and the holders of the Priority Guarantee Notes due 2022. The indenture also provides forcustomary events of default.
Subsidiary Senior Revolving Credit Facility Due 2018
During the third quarter of 2013, CCOH entered into a five-year senior secured revolving credit facility with an aggregate principal amount of$75.0 million. The revolving credit facility may be used for working capital needs, to issue letters of credit and for other general corporate purposes. AtDecember 31, 2014, there were no amounts outstanding under the revolving credit facility and $62.2 million of letters of credit under the revolving creditfacility, which reduce availability under the facility.
27
Senior Cash Pay Notes and Senior Toggle Notes
As of December 31, 2014, iHeartCommunications had no principal amounts outstanding of 10.75% senior cash pay notes due 2016 and11.00%/11.75% senior toggle notes due 2016. In August 2014, iHeartCommunications fully redeemed the remaining notes with proceeds from the issuanceof 14.0% Senior Notes due 2021.
14.0% Senior Notes due 2021
As of December 31, 2014, iHeartCommunications had outstanding approximately $1.66 billion of aggregate principal amount of 14.0% SeniorNotes due 2021 (net of $423.4 million principal amount issued to, and held by, a subsidiary of iHeartCommunications).
The Senior Notes due 2021 mature on February 1, 2021. Interest on the Senior Notes due 2021 is payable semi-annually on February 1 and August 1of each year, which began on August 1, 2013. Interest on the Senior Notes due 2021 will be paid at the rate of (i) 12.0% per annum in cash and (ii) 2.0% perannum through the issuance of payment-in-kind notes (the “PIK Notes”). Any PIK Notes issued in certificated form will be dated as of the applicable interestpayment date and will bear interest from and after such date. All PIK Notes issued will mature on February 1, 2021 and have the same rights and benefits asthe Senior Notes due 2021. The Senior Notes due 2021 are fully and unconditionally guaranteed on a senior basis by the guarantors named in the indenturegoverning such notes. The guarantee is structurally subordinated to all existing and future indebtedness and other liabilities of any subsidiary of theapplicable subsidiary guarantor that is not also a guarantor of the Senior Notes due 2021. The guarantees are subordinated to the guarantees ofiHeartCommunications’ senior secured credit facility and certain other permitted debt, but rank equal to all other senior indebtedness of the guarantors.
iHeartCommunications may redeem or purchase the Senior Notes due 2021 at its option, in whole or in part, at any time prior to August 1, 2015, at aredemption price equal to 100% of the principal amount of Senior Notes due 2021 redeemed plus an applicable premium. In addition, until August 1, 2015,iHeartCommunications may, at its option, on one or more occasions, redeem up to 60% of the then outstanding aggregate principal amount of Senior Notesdue 2021 at a redemption price equal to (x) with respect to the first 30% of the then outstanding aggregate principal amount of the Senior Notes due 2021,109.0% of the aggregate principal amount thereof and (y) with respect to the next 30% of the then outstanding aggregate principal amount of the SeniorNotes due 2021, 112.0% of the aggregate principal amount thereof, in each case plus accrued and unpaid interest thereon to the applicable redemption date.iHeartCommunications may redeem the Senior Notes due 2021, in whole or in part, on or after August 1, 2015, at the redemption prices set forth in theindenture plus accrued and unpaid interest to the redemption date.
The indenture governing the Senior Notes due 2021 contains covenants that limit iHeartCommunications’ ability and the ability of its restrictedsubsidiaries to, among other things: (i) incur additional indebtedness or issue certain preferred stock; (ii) pay dividends on, or make distributions in respectof, their capital stock or repurchase their capital stock; (iii) make certain investments or other restricted payments; (iv) sell certain assets; (v) create liens oruse assets as security in other transactions; (vi) merge, consolidate or transfer or dispose of substantially all of iHeartCommunications’ assets; (vii) engage intransactions with affiliates; and (viii) designate iHeartCommunications’ subsidiaries as unrestricted subsidiaries.
iHeartCommunications Legacy Notes
As of December 31, 2014, iHeartCommunications had approximately $667.9 million aggregate principal amount of senior notes outstanding (net of$57.1 million aggregate principal amount held by a subsidiary of iHeartCommunications).
The senior notes were the obligations of iHeartCommunications prior to the merger. The senior notes are senior, unsecured obligations that areeffectively subordinated to iHeartCommunications’ secured indebtedness to the extent of the value of its assets securing such indebtedness and are notguaranteed by any of iHeartCommunications’ subsidiaries and, as a result, are structurally subordinated to all indebtedness and other liabilities of itssubsidiaries. The senior notes rank equally in right of payment with all of iHeartCommunications’ existing and future senior indebtedness and senior in rightof payment to all existing and future subordinated indebtedness.
10.0% Senior Notes due 2018
As of December 31, 2014, iHeartCommunications had outstanding $730.0 million aggregate principal amount of senior notes due 2018 (net of$120.0 million aggregate principal amount held by a subsidiary of iHeartCommunications). The senior notes due 2018 mature on January 15, 2018 and bearinterest at a rate of 10.0% per annum, payable semi-annually on January 15 and July 15 of each year, which began on July 15, 2014.
The senior notes due 2018 are senior, unsecured obligations that are effectively subordinated to iHeartCommunications’ secured indebtedness tothe extent of the value of iHeartCommunications’ assets securing such indebtedness and are not guaranteed by any of iHeartCommunications’ subsidiariesand, as a result, are structurally subordinated to all indebtedness and other liabilities of iHeartCommunications’ subsidiaries. The senior notes due 2018 rankequally in right of payment with all of iHeartCommunications’ existing and future senior indebtedness and senior in right of payment to all existing andfuture subordinated indebtedness.
28
CCWH Senior Notes
As of December 31, 2014, CCWH senior notes represented $2.7 billion aggregate principal amount of indebtedness outstanding, which consisted of$735.75 million aggregate principal amount of Series A Senior Notes due 2022 (the “Series A CCWH Senior Notes”) and $1,989.25 million aggregateprincipal amount of Series B CCWH Senior Notes due 2022 (the “Series B CCWH Senior Notes”). The CCWH Senior Notes are guaranteed by CCOH, ClearChannel Outdoor, Inc. (“CCOI”) and certain of CCOH’s direct and indirect subsidiaries.
The CCWH Senior Notes are senior obligations that rank pari passu in right of payment to all unsubordinated indebtedness of CCWH and theguarantees of the CCWH Senior Notes rank pari passu in right of payment to all unsubordinated indebtedness of the guarantors. Interest on the CCWH SeniorNotes is payable to the trustee weekly in arrears and to the noteholders on May 15 and November 15 of each year, which began on May 15, 2013.
At any time prior to November 15, 2017, CCWH may redeem the CCWH Senior Notes, in whole or in part, at a price equal to 100% of the principalamount of the CCWH Senior Notes plus a “make-whole” premium, together with accrued and unpaid interest, if any, to the redemption date. CCWH mayredeem the CCWH Senior Notes, in whole or in part, on or after November 15, 2017, at the redemption prices set forth in the applicable indenture governingthe CCWH Senior Notes plus accrued and unpaid interest to the redemption date. At any time on or before November 15, 2015, CCWH may elect to redeemup to 40% of the then outstanding aggregate principal amount of the CCWH Senior Notes at a redemption price equal to 106.500% of the principal amountthereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equity offerings, subject to certain restrictions.Notwithstanding the foregoing, neither CCOH nor any of its subsidiaries is permitted to make any purchase of, or otherwise effectively cancel or retire anySeries A CCWH Senior Notes or Series B CCWH Senior Notes if, after giving effect thereto and, if applicable, any concurrent purchase of or other additionwith respect to any Series B CCWH Senior Notes or Series A CCWH Senior Notes, as applicable, the ratio of (a) the outstanding aggregate principal amountof the Series A CCWH Senior Notes to (b) the outstanding aggregate principal amount of the Series B CCWH Senior Notes shall be greater than 0.25, subjectto certain exceptions.
The indenture governing the Series A CCWH Senior Notes contains covenants that limit CCOH and its restricted subsidiaries ability to, amongother things:
• incur or guarantee additional debt to persons other than iHeartCommunications and its subsidiaries (other than CCOH) or issue certainpreferred stock;
• create liens on its restricted subsidiaries’ assets to secure such debt;
• create restrictions on the payment of dividends or other amounts to CCOH from its restricted subsidiaries that are not guarantors of theCCWH Senior Notes;
• enter into certain transactions with affiliates;
• merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of its assets; and
• sell certain assets, including capital stock of its subsidiaries, to persons other than iHeartCommunications and its subsidiaries (other thanCCOH).
In addition, the indenture governing the Series A CCWH Senior Notes provides that if CCWH (i) makes an optional redemption of the Series BCCWH Senior Notes or purchases or makes an offer to purchase the Series B CCWH Senior Notes at or above 100% of the principal amount thereof, thenCCWH shall apply a pro rata amount to make an optional redemption or purchase a pro rata amount of the Series A CCWH Senior Notes or (ii) makes an assetsale offer under the indenture governing the Series B CCWH Senior Notes, then CCWH shall apply a pro rata amount to make an offer to purchase a pro rataamount of Series A CCWH Senior Notes.
The indenture governing the Series A CCWH Senior Notes does not include limitations on dividends, distributions, investments or asset sales.
The indenture governing the Series B CCWH Senior Notes contains covenants that limit CCOH and its restricted subsidiaries ability to, amongother things:
• incur or guarantee additional debt or issue certain preferred stock;
• redeem, repurchase or retire CCOH’s subordinated debt;
• make certain investments;
29
• create liens on its or its restricted subsidiaries’ assets to secure debt;
• create restrictions on the payment of dividends or other amounts to it from its restricted subsidiaries that are not guarantors of the CCWHSenior Notes;
• enter into certain transactions with affiliates;
• merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of its assets;
• sell certain assets, including capital stock of its subsidiaries;
• designate its subsidiaries as unrestricted subsidiaries; and
• pay dividends, redeem or repurchase capital stock or make other restricted payments.
The Series A CCWH Senior Notes indenture and Series B CCWH Senior Notes indenture restrict CCOH’s ability to incur additional indebtednessbut permit CCOH to incur additional indebtedness based on an incurrence test. In order to incur (i) additional indebtedness under this test, CCOH’s debt toadjusted EBITDA ratios (as defined by the indentures) must be lower than 7.0:1 and 5.0:1 for total debt and senior debt, respectively, and (ii) additionalindebtedness that is subordinated to the CCWH Senior Notes under this test, CCOH’s debt to adjusted EBITDA ratios (as defined by the indentures) must belower than 7.0:1 for total debt. The indentures contain certain other exceptions that allow CCOH to incur additional indebtedness. The Series B CCWHSenior Notes indenture also permits CCOH to pay dividends from the proceeds of indebtedness or the proceeds from asset sales if its debt to adjusted EBITDAratios (as defined by the indentures) are lower than 7.0:1 and 5.0:1 for total debt and senior debt, respectively. The Series A CCWH Senior Notes indenturedoes not limit CCOH’s ability to pay dividends. The Series B CCWH Senior Notes indenture contains certain exceptions that allow CCOH to pay dividends,including (i) $525.0 million of dividends made pursuant to general restricted payment baskets and (ii) dividends made using proceeds received upon ademand by CCOH of amounts outstanding under the revolving promissory note issued by iHeartCommunications to CCOH.
CCWH Senior Subordinated Notes
As of December 31, 2014, CCWH Subordinated Notes represented $2.2 billion of aggregate principal amount of indebtedness outstanding, whichconsist of $275.0 million aggregate principal amount of 7.625% Series A Senior Subordinated Notes due 2020 (the “Series A CCWH Subordinated Notes”)and $1,925.0 million aggregate principal amount of 7.625% Series B Senior Subordinated Notes due 2020 (the “Series B CCWH Subordinated Notes”).Interest on the CCWH Subordinated Notes is payable to the trustee weekly in arrears and to the noteholders on March 15 and September 15 of each year,which began on September 15, 2012.
The CCWH Subordinated Notes are CCWH’s senior subordinated obligations and are fully and unconditionally guaranteed, jointly and severally,on a senior subordinated basis by CCOH, CCOI and certain of CCOH’s other domestic subsidiaries. The CCWH Subordinated Notes are unsecured seniorsubordinated obligations that rank junior to all of CCWH’s existing and future senior debt, including the CCWH Senior Notes, equally with any of CCWH’sexisting and future senior subordinated debt and ahead of all of CCWH’s existing and future debt that expressly provides that it is subordinated to the CCWHSubordinated Notes. The guarantees of the CCWH Subordinated Notes rank junior to each guarantor’s existing and future senior debt, including the CCWHSenior Notes, equally with each guarantor’s existing and future senior subordinated debt and ahead of each guarantor’s existing and future debt thatexpressly provides that it is subordinated to the guarantees of the CCWH Subordinated Notes.
At any time prior to March 15, 2015, CCWH may redeem the CCWH Subordinated Notes, in whole or in part, at a price equal to 100% of theprincipal amount of the CCWH Subordinated Notes plus a “make-whole” premium, together with accrued and unpaid interest, if any, to the redemption date.CCWH may redeem the CCWH Subordinated Notes, in whole or in part, on or after March 15, 2015, at the redemption prices set forth in the applicableindenture governing the CCWH Subordinated Notes plus accrued and unpaid interest to the redemption date. At any time on or before March 15, 2015,CCWH may elect to redeem up to 40% of the then outstanding aggregate principal amount of the CCWH Subordinated Notes at a redemption price equal to107.625% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equity offerings,subject to certain restrictions. Notwithstanding the foregoing, neither CCOH nor any of its subsidiaries is permitted to make any purchase of, or otherwiseeffectively cancel or retire any Series A CCWH Subordinated Notes or Series B CCWH Subordinated Notes if, after giving effect thereto and, if applicable,any concurrent purchase of or other addition with respect to any Series B CCWH Subordinated Notes or Series A CCWH Subordinated Notes, as applicable,the ratio of (a) the outstanding aggregate principal amount of the Series A CCWH Subordinated Notes to (b) the outstanding aggregate principal amount ofthe Series B CCWH Subordinated Notes shall be greater than 0.25, subject to certain exceptions.
30
The indenture governing the Series A CCWH Subordinated Notes contains covenants that limit CCOH and its restricted subsidiaries ability to,among other things:
• incur or guarantee additional debt to persons other than iHeartCommunications and its subsidiaries (other than CCOH) or issue certainpreferred stock;
• create restrictions on the payment of dividends or other amounts to CCOH from its restricted subsidiaries that are not guarantors of thenotes;
• enter into certain transactions with affiliates;
• merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of CCOH’s assets; and
• sell certain assets, including capital stock of CCOH’s subsidiaries, to persons other than iHeartCommunications and its subsidiaries(other than CCOH).
In addition, the indenture governing the Series A CCWH Subordinated Notes provides that if CCWH (i) makes an optional redemption of theSeries B CCWH Subordinated Notes or purchases or makes an offer to purchase the Series B CCWH Subordinated Notes at or above 100% of the principalamount thereof, then CCWH shall apply a pro rata amount to make an optional redemption or purchase a pro rata amount of the Series A CCWHSubordinated Notes or (ii) makes an asset sale offer under the indenture governing the Series B CCWH Subordinated Notes, then CCWH shall apply a pro rataamount to make an offer to purchase a pro rata amount of Series A CCWH Subordinated Notes.
The indenture governing the Series A CCWH Subordinated Notes does not include limitations on dividends, distributions, investments or assetsales.
The indenture governing the Series B CCWH Subordinated Notes contains covenants that limit CCOH and its restricted subsidiaries ability to,among other things:
• incur or guarantee additional debt or issue certain preferred stock;
• make certain investments;
• create restrictions on the payment of dividends or other amounts to CCOH from its restricted subsidiaries that are not guarantors of thenotes;
• enter into certain transactions with affiliates;
• merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of CCOH’s assets;
• sell certain assets, including capital stock of CCOH’s subsidiaries;
• designate CCOH’s subsidiaries as unrestricted subsidiaries; and
• pay dividends, redeem or repurchase capital stock or make other restricted payments.
The Series A CCWH Subordinated Notes indenture and Series B CCWH Subordinated Notes indenture restrict CCOH’s ability to incur additionalindebtedness but permit CCOH to incur additional indebtedness based on an incurrence test. In order to incur additional indebtedness under this test,CCOH’s debt to adjusted EBITDA ratios (as defined by the indentures) must be lower than 7.0:1. The indentures contain certain other exceptions that allowCCOH to incur additional indebtedness. The Series B CCWH Subordinated Notes indenture also permits CCOH to pay dividends from the proceeds ofindebtedness or the proceeds from asset sales if its debt to adjusted EBITDA ratios (as defined by the indentures) is lower than 7.0:1. The Series A CCWHSenior Subordinated Notes indenture does not limit CCOH’s ability to pay dividends. The Series B CCWH Subordinated Notes indenture contains certainexceptions that allow CCOH to pay dividends, including (i) $525.0 million of dividends made pursuant to general restricted payment baskets and(ii) dividends made using proceeds received upon a demand by CCOH of amounts outstanding under the revolving promissory note issued byiHeartCommunications to CCOH.
Historical Refinancing Transactions
2014 Refinancing Transactions
On February 14, 2014, CC Finco, an indirect wholly-owned subsidiary of ours, sold $227.0 million in aggregate principal amount of 14.0% SeniorNotes due 2021 issued by iHeartCommunications to private purchasers in a transaction exempt from registration under the Securities Act of 1933, asamended. This $227.0 million in aggregate principal amount of 14.0% Senior Notes due 2021, which was previously eliminated in consolidation because thenotes were held by a subsidiary, is now reflected on our consolidated balance sheet. CC Finco contributed the net proceeds from the sale of the 14.0% SeniorNotes due 2021 to iHeartCommunications.
31
On May 1, 2014, CCU Escrow Corporation issued $850.0 million in aggregate principal amount of 10.0% Senior Notes due 2018 in a private offer.On June 6, 2014, CCU Escrow Corporation merged into iHeartCommunications, and iHeartCommunications assumed CCU Escrow Corporation’s obligationsunder the Senior Notes due 2018. Using the proceeds from the issuance of the 10.0% Senior Notes due 2018, iHeartCommunications redeemed $567.1million aggregate principal amount of its 5.5% Senior Notes due 2014 (including $158.5 million principal amount of the notes held by a subsidiary ofiHeartCommunications) and $241.0 million aggregate principal amount of iHeartCommunications’ 4.9% Senior Notes due 2015.
On August 22, 2014, iHeartCommunications issued and sold $222.2 million in aggregate principal amount of new 14.0% Senior Notes due 2021 toCC Finco in a transaction exempt from registration under the Securities Act of 1933, as amended. The new 14.0% Senior Notes due 2021 were issued asadditional notes under the indenture governing iHeartCommunications’ existing 14.0% Senior Notes due 2021. On August 22, 2014, iHeartCommunicationsredeemed all of the outstanding $94.3 million aggregate principal amount of 10.75% Senior Cash Pay Notes due 2016 and $127.9 million aggregateprincipal amount of 11.00%/11.75% Senior Toggle Notes due 2016 using proceeds of the issuance of the new 14.0% Senior Notes due 2021.
On September 10, 2014, iHeartCommunications issued and sold $750.0 million in aggregate principal amount of Priority Guarantee Notes due 2022and used the net proceeds of such issuance to prepay at par $729.0 million of the loans outstanding under iHeartCommunications’ Term Loan B facility and$12.1 million of the loans outstanding under iHeartCommunications’ Term Loan C asset sale facility, and to pay accrued and unpaid interest with regard tosuch loans to, but not including, the date of prepayment.
On September 29, 2014, iHeartCommunications issued an additional $250.0 million in aggregate principal amount of Priority Guarantee Notes due2022 and used the proceeds of such issuance to prepay at par $245.9 million of loans outstanding under iHeartCommunications’ Term Loan B facility and$4.1 million of loans outstanding under iHeartCommunications’ Term Loan C asset sale facility, and to pay accrued and unpaid interest with regard to suchloans to, but not including, the date of repayment.
2013 Refinancing Transactions
In February 2013, iHeartCommunications issued $575.0 million aggregate principal amount of the outstanding 11.25% Priority Guarantee Notesand used the net proceeds of such notes, together with the proceeds of borrowings under iHeartCommunications’ receivables based credit facility and cash onhand, to prepay all $846.9 million of loans outstanding under its Term Loan A and to pay related fees and expenses.
During June 2013, iHeartCommunications amended its senior secured credit facility by extending a portion of Term Loan B and Term Loan C loansdue 2016 through the creation of a new $5.0 billion Term Loan D due January 30, 2019. The amendment also permitted iHeartCommunications to makeapplicable high yield discount obligation catch-up payments beginning in May 2018 with respect to the new Term Loan D and any notes issued inconnection with iHeartCommunications’ exchange of its outstanding 10.75% senior cash pay notes due 2016 and 11.00%/11.75% senior toggle notes due2016.
During June 2013, iHeartCommunications exchanged $348.1 million aggregate principal amount of senior cash pay notes for $348.0 millionaggregate principal amount of the Senior Notes due 2021 and $917.2 million aggregate principal amount of senior toggle notes (including $452.7 millionaggregate principal amount held by a subsidiary of iHeartCommunications) for $853.0 million aggregate principal amount of Senior Notes due 2021(including $421.0 million aggregate principal amount issued to the subsidiary of iHeartCommunications) and $64.2 million of cash (including $31.7 millionof cash paid to the subsidiary of iHeartCommunications), pursuant to the exchange offer. In connection with the exchange offer and the senior secured creditfacility amendment, both of which were accounted for as modifications of existing debt in accordance with ASC 470-50, we incurred expenses of$17.9 million which are included in “Other income (expenses), net”.
Further, in December 2013, iHeartCommunications exchanged an additional $353.8 million aggregate principal amount of senior cash pay notes for$389.2 million aggregate principal amount of the Senior Notes due 2021 and $14.2 million of cash as well as an additional $212.1 million aggregateprincipal amount of senior toggle notes for $233.3 million aggregate principal amount of Senior Notes due 2021 and $8.5 million of cash, pursuant to theexchange offer. In connection with the exchange offer, which was accounted for as extinguishment of existing debt in accordance with ASC 470-50, weincurred expenses of $84.0 million, which are included in “Loss on extinguishment of debt”.
In addition, during December 2013, iHeartCommunications amended its senior secured credit facility by extending a portion of Term Loan B andTerm Loan C loans due 2016 through the creation of a new $1.3 billion Term Loan E due July 30, 2019. In connection with the senior secured credit facilityamendment, which was accounted for as modifications of existing debt, we incurred expenses of $5.5 million which are included in “Other income(expenses), net”.
32
2012 Refinancing Transactions
In March 2012, CCWH issued $275.0 million aggregate principal amount of the Series A CCWH Subordinated Notes and $1,925.0 millionaggregate principal amount of the Series B CCWH Subordinated Notes and in connection therewith, CCOH distributed a dividend of $6.0832 per share to itsstockholders of record. Using the CCOH dividend proceeds distributed to our wholly-owned subsidiaries, together with cash on hand, iHeartCommunicationsrepaid $2,096.2 million of indebtedness under its senior secured credit facilities.
During October 2012, iHeartCommunications exchanged $2.0 billion aggregate principal amount of Term Loans under its senior secured creditfacilities for a like principal amount of newly issued iHeartCommunications Priority Guarantee Notes due 2019. The exchange offer, which was offered toeligible existing lenders under iHeartCommunications’ senior secured credit facilities, was exempt from registration under the Securities Act of 1933, asamended. We capitalized $11.9 million in fees and expenses associated with the offering and are amortizing them through interest expense over the life of thenotes.
In November 2012, CCWH issued $735.75 million aggregate principal amount of the Series A CCWH Senior Notes, which were issued at an issueprice of 99.0% of par, and $1,989.25 million aggregate principal amount of the Series B CCWH Senior Notes, which were issued at par. CCWH used the netproceeds from the offering of the CCWH Senior Notes, together with cash on hand, to fund the tender offer for and redemption of the Existing CCWH SeniorNotes.
Dispositions and Other
2014
During 2014, we sold our 50% interest in Australian Radio Network (“ARN”), an Australian company that owns and operates radio stations inAustralia and New Zealand. An impairment charge of $95.4 million was recorded during the fourth quarter of 2013 to write down the investment to itsestimated fair value. Upon sale of ARN, we recognized a loss of $2.4 million and $11.5 million of foreign exchange losses, which were reclassified fromaccumulated other comprehensive income.
During 2014, our International outdoor segment sold its 50% interest in Buspak, a bus advertising company in Hong Kong and recognized a gainon sale of $4.5 million.
2013
During 2013, our Americas outdoor segment divested certain outdoor advertising assets in Times Square for approximately $18.7 million resultingin a gain of $12.2 million. In addition, our iHM segment exercised a put option that sold five radio stations in the Green Bay market for approximately$17.6 million and recorded a gain of $0.5 million. These net gains are included in “Other operating income, net”.
We sold our shares of Sirius XM Radio, Inc. for $135.5 million and recognized a gain on the sale of securities of $130.9 million. This net gain isincluded in “Gain on sale of marketable securities”.
2012
During 2012, our International outdoor segment sold its international neon business and its outdoor advertising business in Romania, resulting inan aggregate gain of $39.7 million included in “Other operating income, net”.
33
Uses of Capital
Debt Repurchases, Maturities and Other
2014
During the period of October 1, 2014 through December 31, 2014, CC Finco repurchased via open market transactions a total of $177.1 millionaggregate principal amount of notes, comprised of $57.1 million of iHeartCommunications’ outstanding 5.5% Senior Notes due 2016 and $120.0 million ofiHeartCommunications’ outstanding 10.0% Senior Notes due 2018, for a total purchase price of $159.3 million, including accrued interest. The notesrepurchased by CC Finco were not cancelled and remain outstanding.
On September 29, 2014, iHeartCommunications prepaid at par $245.9 million of the loans outstanding under its Term Loan B facility and $4.1million of the loans outstanding under its Term Loan C asset sale facility, using the net proceeds of the Priority Guarantee Notes due 2022 issued on suchdate.
On September 10, 2014, iHeartCommunications prepaid at par $729.0 million of the loans outstanding under its Term Loan B facility and $12.1million of the loans outstanding under its Term Loan C asset sale facility, using the net proceeds of the Priority Guarantee Notes due 2022 issued on suchdate.
On August 22, 2014, iHeartCommunications redeemed all of the outstanding $94.3 million aggregate principal amount of 10.75% Senior Cash PayNotes due 2016 and $127.9 million aggregate principal amount of 11.00%/11.75% Senior Toggle Notes due 2016 using proceeds of the issuance to CCFinco of new 14.0% Senior Notes due 2021.
On June 6, 2014, using the proceeds from the issuance of the 10.0% Senior Notes due 2018, iHeartCommunications redeemed $567.1 millionaggregate principal amount of its 5.5% Senior Notes due 2014 (including $158.5 million principal amount of the notes held by a subsidiary ofiHeartCommunications) and $241.0 million aggregate principal amount of iHeartCommunications’ 4.9% Senior Notes due 2015.
During March 2014, CC Finco repurchased, through open market purchases, a total of $61.9 million aggregate principal amount of notes, comprisedof $52.9 million of iHeartCommunications’ outstanding 5.5% Senior Notes due 2014 and $9.0 million of its outstanding 4.9% Senior Notes due 2015, for atotal purchase price of $63.1 million, including accrued interest. CC Finco contributed the notes to a subsidiary of iHeartCommunications andiHeartCommunications cancelled these notes subsequent to the purchase.
During February 2014, iHeartCommunications repaid all principal amounts outstanding under its receivables based credit facility, using cash onhand. This voluntary repayment did not reduce the commitments under this facility and iHeartCommunications has the ability to redraw amounts under thisfacility at any time.
2013
During August 2013, iHeartCommunications made a $25.3 million scheduled applicable high-yield discount obligation payment to the holders ofthe senior toggle notes.
During February 2013, using the proceeds from the issuance of the 11.25% Priority Guarantee Notes along with borrowings under the receivablesbased credit facility of $269.5 million and cash on hand, iHeartCommunications prepaid all $846.9 million outstanding under Term Loan A under its seniorsecured credit facilities. We recorded a loss of $3.9 million in “Loss on extinguishment of debt” related to the accelerated expensing of loan fees.
During January 2013, iHeartCommunications repaid its 5.75% senior notes at maturity for $312.1 million (net of $187.9 million principal amountrepaid to a subsidiary of iHeartCommunications with respect to notes repurchased and held by such entity), plus accrued interest, using cash on hand.
2012
During November 2012, CCWH repurchased $1,724.7 million aggregate principal amount of the Existing CCWH Senior Notes in a tender offer forthe Existing CCWH Senior Notes. Simultaneously with the early settlement of the tender offer, CCWH called for redemption all of the remaining$775.3 million aggregate principal amount of Existing CCWH Senior Notes that were not purchased on the early settlement date of the tender offer. Inconnection with the redemption, CCWH satisfied and discharged its obligations under the Existing CCWH Senior Notes indentures by depositing with thetrustee sufficient funds to pay the redemption price, plus accrued and unpaid interest on the remaining outstanding Existing CCWH Senior Notes to, but notincluding, the December 19, 2012 redemption date.
During October 2012, iHeartCommunications consummated a private exchange offer of $2.0 billion aggregate principal amount of Term Loansunder its senior secured credit facilities for a like principal amount of newly issued Priority Guarantee Notes due 2019. The exchange offer was available onlyto eligible lenders under the senior secured credit facilities, and the Priority Guarantee Notes due 2019 were offered only in reliance on exemptions fromregistration under the Securities Act of 1933, as amended.
34
In connection with the issuance of the CCWH Subordinated Notes, CCOH paid a $2,170.4 million CCOH dividend on March 15, 2012 to itsClass A and Class B stockholders, consisting of $1,925.7 million distributed to CC Holdings and CC Finco and $244.7 million distributed to otherstockholders. In connection with the Subordinated Notes issuance and CCOH dividend, iHeartCommunications repaid indebtedness under its senior securedcredit facilities in an amount equal to the aggregate amount of dividend proceeds distributed to CC Holdings and CC Finco, or $1,925.7 million. Of thisamount, a prepayment of $1,918.1 million was applied to indebtedness outstanding under iHeartCommunications’ revolving credit facility, thus permanentlyreducing the revolving credit commitments under its revolving credit facility to $10.0 million. During the fourth quarter of 2012, the revolving credit facilitywas permanently paid off and terminated using available cash on hand. The remaining $7.6 million prepayment was allocated on a pro rata basis toiHeartCommunications’ Term Loan facilities.
In addition, on March 15, 2012, using cash on hand, iHeartCommunications made voluntary prepayments under its senior secured credit facilities inan aggregate amount equal to $170.5 million, as follows: (i) $16.2 million under its Term Loan A due 2014, (ii) $129.8 million under its Term Loan B due2016, (iii) $10.0 million under its Term Loan C due 2016 and (iv) $14.5 million under its delayed draw Term Loans due 2016. In connection with theprepayments on iHeartCommunications’ senior secured credit facilities, we recorded a loss of $15.2 million in “Loss on extinguishment of debt” related tothe accelerated expensing of loan fees.
During March 2012, iHeartCommunications repaid its 5.0% senior notes at maturity for $249.9 million (net of $50.1 million principal amountrepaid to a subsidiary of iHeartCommunications with respect to notes repurchased and held by such entity), plus accrued interest, using a portion of theproceeds from the June 2011 offering of priority guarantee notes, along with cash on hand.
Capital Expenditures
Capital expenditures for the years ended December 31, 2014, 2013 and 2012 were as follows: (In millions) Years Ended December 31, 2014 2013 2012 iHM $ 50.4 $ 75.8 $ 65.8 Americas outdoor advertising 109.7 96.6 130.8 International outdoor advertising 117.5 100.9 137.0 Corporate and Other 40.6 51.2 56.7
Total capital expenditures $ 318.2 $ 324.5 $ 390.3
Our capital expenditures are not of significant size individually and primarily relate to the ongoing deployment of digital displays andimprovements to traditional displays in our Americas outdoor segment as well as new billboard and street furniture contracts and renewals of existingcontracts in our International outdoor segment, studio and broadcast equipment at iHM and software at Corporate.
Dividends
We have never paid cash dividends on our Class A common stock. iHeartCommunications’ debt financing arrangements include restrictions on itsability to pay dividends as described in this MD&A, which in turn affects our ability to pay dividends.
Acquisitions
The Company is the beneficiary of Aloha Station Trust, LLC (the “Aloha Trust”), which owns and operates radio stations which the Aloha Trust isrequired to divest in order to comply with Federal Communication Commission (“FCC”) media ownership rules, and which are being marketed for sale.During 2014, the Aloha Trust completed a transaction in which it exchanged two radio stations for a portfolio of 29 radio stations. In this transaction theCompany received 28 radio stations. One radio station was placed into the Brunswick Station Trust, LLC in order to comply with FCC media ownership ruleswhere it is being marketed for sale, and the Company is the beneficiary of this trust. The exchange was accounted for at fair value in accordance with ASC805, Business Combinations. The disposal of these radio stations resulted in a gain on sale of $43.5 million, which is included in other operating income.This acquisition resulted in an aggregate increase in net assets of $49.2 million, which includes $13.8 million in indefinite-lived intangible assets, $10.2million in definite-lived intangibles, $8.1 million in property, plant and equipment and $0.8 million of assumed liabilities. In addition, the Companyrecognized $17.9 million of goodwill.
35
During 2012, we completed the acquisition of WOR-AM in New York City for $30.0 million and WFNX in Boston for $14.5 million. Theseacquisitions resulted in an aggregate increase of $5.3 million to property plant and equipment, $15.2 million to intangible assets and $24.7 million togoodwill, in addition to $0.7 million of assumed liabilities.
Stock Purchases
On August 9, 2010, iHeartCommunications announced that its board of directors approved a stock purchase program under whichiHeartCommunications or its subsidiaries may purchase up to an aggregate of $100.0 million of our Class A common stock and/or the Class A common stockof CCOH. The stock purchase program did not have a fixed expiration date and could be modified, suspended or terminated at any time atiHeartCommunications’ discretion. During 2014, CC Finco purchased 5,000,000 shares of CCOH’s Class A common stock for approximately $48.8 million.During 2012, CC Finco purchased 111,291 shares of our Class A common stock for $0.7 million. During 2011, CC Finco purchased 1,553,971 shares ofCCOH’s Class A common stock through open market purchases for approximately $16.4 million. As of December 31, 2014, an aggregate $34.2 million wasavailable under the stock purchase program to purchase our Class A common stock and/or the Class A common stock of CCOH.
On January 7, 2015, CC Finco, our indirect wholly-owned subsidiary, purchased 2,000,000 shares of CCOH’s Class A common stock for $20.4million.
Certain Relationships with the Sponsors
iHeartCommunications is party to a management agreement with certain affiliates of Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P.(together, the “Sponsors”) and certain other parties pursuant to which such affiliates of the Sponsors will provide management and financial advisory servicesuntil 2018. These arrangements require management fees to be paid to such affiliates of the Sponsors for such services at a rate not greater than $15.0 millionper year, plus reimbursable expenses. During the years ended December 31, 2014, 2013 and 2012, we recognized management fees and reimbursableexpenses of $15.2 million, $15.8 million and $15.9 million, respectively.
CCOH Dividend
In connection with the cash management arrangements for CCOH, iHeartCommunications maintains an intercompany revolving promissory notepayable by iHeartCommunications to CCOH (the “Note”), which consists of the net activities resulting from day-to-day cash management services providedby iHeartCommunications to CCOH. As of December 31, 2014, the balance of the Note was $947.8 million all of which is payable on demand. The Note iseliminated in consolidation in our consolidated financial statements.
The Note previously was the subject of litigation. Pursuant to the terms of the settlement of that litigation, CCOH’s board of directors established acommittee for the specific purpose of monitoring the Note. That committee has the non-exclusive authority, pursuant to the terms of its charter, to demandpayments under the Note under certain specified circumstances tied to the Company’s liquidity or the amount outstanding under the Due from Note as longas CCOH makes a simultaneous dividend equal to the amount so demanded.
On August 11, 2014, in accordance with the terms of its charter, (i) that committee demanded repayment of $175 million outstanding under the Noteon such date and (ii) CCOH paid a special cash dividend in aggregate amount equal to $175 million to CCOH’s stockholders of record as of August 4, 2014.As the indirect parent of CCOH, we were entitled to approximately 88% of the proceeds from such dividend through our wholly-owned subsidiaries. Theremaining approximately 12% of the proceeds from the dividend, or approximately $21 million, was paid to the public stockholders of CCOH and isincluded in “Dividends and other payments to noncontrolling interests” in our consolidated statement of cash flows. We funded the net payment of this $21million with cash on hand, which reduced the amount of cash we have available to fund our working capital needs, debt service obligations and otherobligations. Following satisfaction of the demand, the balance outstanding under the Note was reduced by $175 million.
36
Commitments, Contingencies and Guarantees
We are currently involved in certain legal proceedings arising in the ordinary course of business and, as required, have accrued our estimate of theprobable costs for resolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. These estimates havebeen developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlementstrategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or theeffectiveness of our strategies related to these proceedings. Please refer to Item 3. “Legal Proceedings” within Part I of this Annual Report on Form 10-K.
Certain agreements relating to acquisitions provide for purchase price adjustments and other future contingent payments based on the financialperformance of the acquired companies generally over a one to five-year period. The aggregate of these contingent payments, if performance targets are met,would not significantly impact our financial position or results of operations.
In addition to our scheduled maturities on our debt, we have future cash obligations under various types of contracts. We lease office space, certainbroadcast facilities, equipment and the majority of the land occupied by our outdoor advertising structures under long-term operating leases. Some of ourlease agreements contain renewal options and annual rental escalation clauses (generally tied to the consumer price index), as well as provisions for ourpayment of utilities and maintenance.
We have minimum franchise payments associated with non-cancelable contracts that enable us to display advertising on such media as buses, trains,bus shelters and terminals. The majority of these contracts contain rent provisions that are calculated as the greater of a percentage of the relevant advertisingrevenue or a specified guaranteed minimum annual payment. Also, we have non-cancelable contracts in our radio broadcasting operations related to programrights and music license fees.
In the normal course of business, our broadcasting operations have minimum future payments associated with employee and talent contracts. Thesecontracts typically contain cancellation provisions that allow us to cancel the contract with good cause. The scheduled maturities of iHeartCommunications’senior secured credit facilities, receivables based facility, priority guarantee notes, other long-term debt outstanding, and our future minimum rentalcommitments under non-cancelable lease agreements, minimum payments under other non-cancelable contracts, payments under employment/talentcontracts, capital expenditure commitments and other long-term obligations as of December 31, 2014 are as follows: (In thousands) Payments due by Period
Contractual Obligations Total 2015 2016-2017 2018-2019 Thereafter Long-term Debt:
Total $ 35,427,129 $ 2,826,129 $ 6,034,474 $ 12,862,638 $ 13,703,131 (1) Interest payments on the senior secured credit facilities assume the interest rate is held constant over the remaining term.(2) The non-current portion of the unrecognized tax benefits is included in the “Thereafter” column as we cannot reasonably estimate the timing or
amounts of additional cash payments, if any, at this time.(3) Other long-term obligations consist of $53.9 million related to asset retirement obligations recorded pursuant to ASC 410-20, which assumes the
underlying assets will be removed at some period over the next 50 years. Also included are $52.3 million of contract payments in our syndicatedradio and media representation businesses and $237.6 million of various other long-term obligations.
37
SEASONALITY
Typically, our iHM, Americas outdoor and International outdoor segments experience their lowest financial performance in the first quarter of thecalendar year, with International outdoor historically experiencing a loss from operations in that period. Our International outdoor segment typicallyexperiences its strongest performance in the second and fourth quarters of the calendar year. We expect this trend to continue in the future.
MARKET RISK
We are exposed to market risks arising from changes in market rates and prices, including movements in interest rates, foreign currency exchangerates and inflation.
Interest Rate Risk
A significant amount of our long-term debt bears interest at variable rates. Accordingly, our earnings will be affected by changes in interest rates. AtDecember 31, 2014, approximately 35% of our aggregate principal amount of long-term debt bears interest at floating rates. Assuming the current level ofborrowings and assuming a 100% change in LIBOR, it is estimated that our interest expense for the year ended December 31, 2014 would have changed by$11.2 million.
In the event of an adverse change in interest rates, management may take actions to mitigate our exposure. However, due to the uncertainty of theactions that would be taken and their possible effects, the preceding interest rate sensitivity analysis assumes no such actions. Further, the analysis does notconsider the effects of the change in the level of overall economic activity that could exist in such an environment.
Foreign Currency Exchange Rate Risk
We have operations in countries throughout the world. Foreign operations are measured in their local currencies. As a result, our financial resultscould be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we haveoperations. We believe we mitigate a small portion of our exposure to foreign currency fluctuations with a natural hedge through borrowings in currenciesother than the U.S. dollar. Our foreign operations reported net income of $80.2 million for the year ended December 31, 2014. We estimate a 10% increase inthe value of the U.S. dollar relative to foreign currencies would have increased our net income for the year ended December 31, 2014 by $8.0 million. A 10%decrease in the value of the U.S. dollar relative to foreign currencies during the year ended December 31, 2014 would have decreased our net income by acorresponding amount.
This analysis does not consider the implications that such currency fluctuations could have on the overall economic activity that could exist insuch an environment in the U.S. or the foreign countries or on the results of operations of these foreign entities.
Inflation
Inflation is a factor in the economies in which we do business and we continue to seek ways to mitigate its effect. Inflation has affected ourperformance in terms of higher costs for wages, salaries and equipment. Although the exact impact of inflation is indeterminable, we believe we have offsetthese higher costs by increasing the effective advertising rates of most of our broadcasting stations and outdoor display faces in our iHM, Americas outdoor,and International outdoor operations.
NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 2014, we adopted the Financial Accounting Standards Board’s (“FASB”) ASU No. 2013-04, Obligations Resulting fromJoint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This update provides guidance forthe recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of theobligation within the scope of this guidance is fixed at the reporting date. The amendments are effective for fiscal years (and interim periods within)beginning after December 15, 2013 and are to be applied retrospectively to all prior periods presented for such obligations that exist at the beginning of anentity’s fiscal year of adoption. The adoption of this guidance did not have a material effect on our consolidated financial statements.
38
During the first quarter of 2014, we adopted the FASB’s ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment uponDerecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity of an Investment in a Foreign Entity. The amendments are effectiveprospectively for the fiscal years (and interim periods within) beginning after December 15, 2013 and provide clarification guidance for the release of thecumulative translation adjustment under current U.S. GAAP. The adoption of this guidance did not have a material effect on our consolidated financialstatements.
During the first quarter of 2014, we adopted the FASB’s ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net OperatingLoss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update requires unrecognized tax benefits to be offset against a deferredtax asset for a net operating loss carryforward, similar tax loss or tax credit carryforward in certain situations. The amendments are effective prospectively forthe fiscal years (and interim periods within) beginning after December 15, 2013. The adoption of this guidance did not have a material effect on ourconsolidated financial statements.
During the second quarter of 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard providesguidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the currentrevenue recognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning afterDecember 15, 2016. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations.
During the third quarter of 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award ProvideThat a Performance Target Could Be Achieved after the Requisite Service Period. This new standard clarifies that a performance target in a share-basedcompensation award that could be achieved after an employee completes the requisite service period should be treated as a performance condition that affectsthe vesting of the award. The standard is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015.The Company is currently evaluating the impact of the provisions of this new standard on its financial position and results of operations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reportedamount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about thecarrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Because future events and theireffects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Oursignificant accounting policies are discussed in the notes to our consolidated financial statements included in
39
Item 8 Part II of this Annual Report on Form 10-K. Management believes that the following accounting estimates are the most critical to aid in fullyunderstanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting fromthe need to make estimates about the effect of matters that are inherently uncertain. The following narrative describes these critical accounting estimates, thejudgments and assumptions and the effect if actual results differ from these assumptions.
Allowance for Doubtful Accounts
We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specificcustomer’s inability to meet its financial obligations, we record a specific reserve to reduce the amounts recorded to what we believe will be collected. For allother customers, we recognize reserves for bad debt based on historical experience for each business unit, adjusted for relative improvements or deteriorationsin the agings and changes in current economic conditions.
If our agings were to improve or deteriorate resulting in a 10% change in our allowance, we estimated that our bad debt expense for the year endedDecember 31, 2014 would have changed by approximately $4.0 million.
Long-lived Assets
Long-lived assets, including structures and other property, plant and equipment and definite-lived intangibles, are reported at historical cost lessaccumulated depreciation and amortization. We estimate the useful lives for various types of advertising structures and other long-lived assets based on ourhistorical experience and our plans regarding how we intend to use those assets. Advertising structures have different lives depending on their nature, withlarge format bulletins generally having longer depreciable lives and posters and other displays having shorter depreciable lives. Street furniture and transitdisplays are depreciated over their estimated useful lives or appropriate contractual periods, whichever is shorter. Our experience indicates that the estimateduseful lives applied to our portfolio of assets have been reasonable, and we do not expect significant changes to the estimated useful lives of our long-livedassets in the future. When we determine that structures or other long-lived assets will be disposed of prior to the end of their useful lives, we estimate therevised useful lives and depreciate the assets over the revised period. We also review long-lived assets for impairment when events and circumstancesindicate that depreciable and amortizable long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets areless than the carrying amounts of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect thecurrent fair market value.
We use various assumptions in determining the remaining useful lives of assets to be disposed of prior to the end of their useful lives and indetermining the current fair market value of long-lived assets that are determined to be unrecoverable. Estimated useful lives and fair values are sensitive tofactors including contractual commitments, regulatory requirements, future expected cash flows, industry growth rates and discount rates, as well as futuresalvage values. Our impairment loss calculations require management to apply judgment in estimating future cash flows, including forecasting useful lives ofthe assets and selecting the discount rate that reflects the risk inherent in future cash flows.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposedto future impairment losses that could be material to our results of operations.
Indefinite-lived Intangible Assets
In connection with the Merger Agreement pursuant to which we acquired iHeartCommunications in 2008, we allocated the purchase price to all ofour assets and liabilities at estimated fair values, including our FCC licenses and our billboard permits. Indefinite-lived intangible assets, such as our FCClicenses and our billboard permits, are reviewed annually for possible impairment using the direct valuation method as prescribed in ASC 805-20-S99. Underthe direct valuation method, the estimated fair value of the indefinite-lived intangible assets was calculated at the market level as prescribed by ASC 350-30-35. Under the direct valuation method, it is assumed that rather than acquiring indefinite-lived intangible assets as a part of a going concern business, thebuyer hypothetically obtains indefinite-lived intangible assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-upcosts during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flowsmodel which results in value that is directly attributable to the indefinite-lived intangible assets.
Our key assumptions using the direct valuation method are market revenue growth rates, market share, profit margin, duration and profile of thebuild-up period, estimated start-up capital costs and losses incurred during the build-up period, the risk-adjusted discount rate and terminal values. This datais populated using industry normalized information representing an average asset within a market.
On October 1, 2014, we performed our annual impairment test in accordance with ASC 350-30-35 and recognized aggregate impairment charges of$15.7 million related to FCC Licenses in our iHM business.
40
In determining the fair value of our FCC licenses, the following key assumptions were used:
• Revenue growth sales forecast and published by BIA Financial Network, Inc. (“BIA”), varying by market, were used for the initial four-year period;
• 2% revenue growth was assumed beyond the initial four-year period;
• Revenue was grown proportionally over a build-up period, reaching market revenue forecast by year 3;
• Operating margins of 12.5% in the first year gradually climb to the industry average margin in year 3 of up to 29.6%, depending onmarket size; and
• Assumed discount rates of 9.5% for the 13 largest markets and 10.0% for all other markets.
In determining the fair value of our billboard permits, the following key assumptions were used:
• Industry revenue growth forecast at 3.0% was used for the initial four-year period;
• 3% revenue growth was assumed beyond the initial four-year period;
• Revenue was grown over a build-up period, reaching maturity by year 2;
• Operating margins gradually climb to the industry average margin of up to 56%, depending on market size, by year 3; and
• Assumed discount rate of 8.5%.
While we believe we have made reasonable estimates and utilized appropriate assumptions to calculate the fair value of our indefinite-livedintangible assets, it is possible a material change could occur. If future results are not consistent with our assumptions and estimates, we may be exposed toimpairment charges in the future. The following table shows the change in the fair value of our indefinite-lived intangible assets that would result from a 100basis point decline in our discrete and terminal period revenue growth rate and profit margin assumptions and a 100 basis point increase in our discount rateassumption: (In thousands)Description Revenue Growth Rate Profit Margin Discount Rates FCC license $ 387,466 $ 139,220 $ 414,736 Billboard permits $ 803,300 $ 137,600 $ 807,000
The estimated fair value of our FCC licenses and billboard permits at October 1, 2014 and 2013 was $5.5 billion and $5.6 billion, respectively,while the carrying value was $3.5 billion and $3.5 billion, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. We testgoodwill at interim dates if events or changes in circumstances indicate that goodwill might be impaired. The fair value of our reporting units is used to applyvalue to the net assets of each reporting unit. To the extent that the carrying amount of net assets would exceed the fair value, an impairment charge may berequired to be recorded.
The discounted cash flow approach we use for valuing goodwill as part of the two-step impairment testing approach involves estimating future cashflows expected to be generated from the related assets, discounted to their present value using a risk-adjusted discount rate. Terminal values are alsoestimated and discounted to their present value.
On October 1, 2014, we performed our annual impairment test in accordance with ASC 350-30-35, resulting in no goodwill impairment charge. Indetermining the fair value of our reporting units, we used the following assumptions:
• Expected cash flows underlying our business plans for the periods 2014 through 2018. Our cash flow assumptions are based on detailed,multi-year forecasts performed by each of our operating segments, and reflect the advertising outlook across our businesses.
• Cash flows beyond 2018 are projected to grow at a perpetual growth rate, which we estimated at 2% for our iHM segment, 3% for ourAmericas outdoor and International outdoor segments, and 2.0% for our Other segment.
• In order to risk adjust the cash flow projections in determining fair value, we utilized a discount rate of approximately 8.5% to 12.0% foreach of our reporting units.
41
Based on our annual assessment using the assumptions described above, a hypothetical 25% reduction in the estimated fair value in each of ourreporting units would not result in a material impairment condition.
While we believe we have made reasonable estimates and utilized appropriate assumptions to calculate the estimated fair value of our reportingunits, it is possible a material change could occur. If future results are not consistent with our assumptions and estimates, we may be exposed to impairmentcharges in the future. The following table shows the decline in the fair value of each of our reportable segments that would result from a 100 basis pointdecline in our discrete and terminal period revenue growth rate and profit margin assumptions and a 100 basis point increase in our discount rate assumption: (In thousands)Description Revenue Growth Rate Profit Margin Discount Rates iHM $ 1,420,000 $ 340,000 $ 1,360,000 Americas Outdoor $ 853,200 $ 172,800 $ 799,200 International Outdoor $ 387,200 $ 211,200 $ 352,000
Tax Accruals
Our estimates of income taxes and the significant items giving rise to the deferred tax assets and liabilities are shown in the notes to ourconsolidated financial statements and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, givingconsideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax lawor results from the final review of our tax returns by federal, state or foreign tax authorities.
We use our judgment to determine whether it is more likely than not that our deferred tax assets will be realized. Deferred tax assets are reduced byvaluation allowances if the Company believes it is more than likely than not that some portion or the entire asset will not be realized.
We use our judgment to determine whether it is more likely than not that we will sustain positions that we have taken on tax returns and, if so, theamount of benefit to initially recognize within our financial statements. We regularly review our uncertain tax positions and adjust our unrecognized taxbenefits (UTBs) in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law.These adjustments to our UTBs may affect our income tax expense. Settlement of uncertain tax positions may require use of our cash.
Litigation Accruals
We are currently involved in certain legal proceedings. Based on current assumptions, we have accrued an estimate of the probable costs for theresolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. Future results of operations could bematerially affected by changes in these assumptions or the effectiveness of our strategies related to these proceedings.
Management’s estimates used have been developed in consultation with counsel and are based upon an analysis of potential results, assuming acombination of litigation and settlement strategies.
Insurance Accruals
We are currently self-insured beyond certain retention amounts for various insurance coverages, including general liability and property andcasualty. Accruals are recorded based on estimates of actual claims filed, historical payouts, existing insurance coverage and projected future development ofcosts related to existing claims. Our self-insured liabilities contain uncertainties because management must make assumptions and apply judgment toestimate the ultimate cost to settle reported claims and claims incurred but not reported as of December 31, 2014.
If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material. A 10% changein our self-insurance liabilities at December 31, 2014 would have affected our net loss by approximately $2.2 million for the year ended December 31, 2014.
42
Asset Retirement Obligations
ASC 410-20 requires us to estimate our obligation upon the termination or nonrenewal of a lease, to dismantle and remove our billboard structuresfrom the leased land and to reclaim the site to its original condition.
Due to the high rate of lease renewals over a long period of time, our calculation assumes all related assets will be removed at some period over thenext 50 years. An estimate of third-party cost information is used with respect to the dismantling of the structures and the reclamation of the site. The interestrate used to calculate the present value of such costs over the retirement period is based on an estimated risk-adjusted credit rate for the same period. If ourassumption of the risk-adjusted credit rate used to discount current year additions to the asset retirement obligation decreased approximately 1%, our liabilityas of December 31, 2014 would not be materially impacted. Similarly, if our assumption of the risk-adjusted credit rate increased approximately 1%, ourliability would not be materially impacted.
Share-Based Compensation
Under the fair value recognition provisions of ASC 718-10, share-based compensation cost is measured at the grant date based on the fair value ofthe award. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiturerates, among other factors. If actual results differ significantly from these estimates, our results of operations could be materially impacted.
43
Exhibit 99.2
CONSOLIDATED BALANCE SHEETS
(In thousands) December 31, 2014 December 31, 2013
CURRENT ASSETSCash and cash equivalents $ 457,024 $ 708,151 Accounts receivable, net of allowance of $39,698 in 2014 and $48,401 in 2013 1,395,248 1,440,501 Prepaid expenses 191,572 203,485 Other current assets 136,299 161,157
Total Current Assets 2,180,143 2,513,294 PROPERTY, PLANT AND EQUIPMENT
Structures, net 1,614,199 1,765,510 Other property, plant and equipment, net 1,084,865 1,132,120
INTANGIBLE ASSETS AND GOODWILLIndefinite-lived intangibles - licenses 2,411,071 2,416,406 Indefinite-lived intangibles - permits 1,066,748 1,067,783 Other intangibles, net 1,206,727 1,466,546 Goodwill 4,187,424 4,202,187
OTHER ASSETSOther assets 289,065 533,456 Total Assets $ 14,040,242 $ 15,097,302
CURRENT LIABILITIESAccounts payable $ 132,258 $ 131,370 Accrued expenses 799,475 807,210 Accrued interest 252,900 194,844 Deferred income 176,048 176,460 Current portion of long-term debt 3,604 453,734
Total Current Liabilities 1,364,285 1,763,618 Long-term debt 20,322,414 20,030,479 Deferred income taxes 1,563,888 1,537,820 Other long-term liabilities 454,863 462,020 Commitments and contingent liabilities (Note 7)
SHAREHOLDERS’ DEFICITNoncontrolling interest 224,140 245,531 Class A Common Stock, par value $.001 per share, authorized 400,000,000 shares, issued
29,307,583 and 29,504,379 shares in 2014 and 2013, respectively 29 29 Class B Common Stock, par value $.001 per share, authorized 150,000,000 shares, issued
555,556 shares in 2014 and 2013 1 1 Class C Common Stock, par value $.001 per share, authorized 100,000,000 shares, issued
58,967,502 shares in 2014 and 2013 59 59 Additional paid-in capital 2,102,789 2,148,303 Accumulated deficit (11,682,390) (10,888,629) Accumulated other comprehensive loss (308,590) (196,073) Cost of shares (227,638 in 2014 and 1,402,227 in 2013) held in treasury (1,246) (5,856)
Total Shareholders’ Deficit (9,665,208) (8,696,635) Total Liabilities and Shareholders’ Deficit $ 14,040,242 $ 15,097,302
See Notes to Consolidated Financial Statements
1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Years Ended December 31, 2014 2013 2012 Revenue $ 6,318,533 $ 6,243,044 $ 6,246,884
Operating expenses:Direct operating expenses (excludes depreciation and amortization) 2,540,950 2,565,020 2,504,529 Selling, general and administrative expenses (excludes depreciation and
amortization) 1,680,623 1,638,928 1,660,289 Corporate expenses (excludes depreciation and amortization) 320,331 313,514 293,207 Depreciation and amortization 710,898 730,828 729,285 Impairment charges 24,176 16,970 37,651 Other operating income, net 40,031 22,998 48,127
Operating income 1,081,586 1,000,782 1,070,050 Interest expense 1,741,596 1,649,451 1,549,023 Gain (loss) on marketable securities - 130,879 (4,580) Equity in earnings (loss) of nonconsolidated affiliates (9,416) (77,696) 18,557 Loss on extinguishment of debt (43,347) (87,868) (254,723) Other income (expense), net 9,104 (21,980) 250 Loss before income taxes (703,669) (705,334) (719,469) Income tax benefit (expense) (58,489) 121,817 308,279 Consolidated net loss (762,158) (583,517) (411,190)
Less amount attributable to noncontrolling interest 31,603 23,366 13,289 Net loss attributable to the Company $ (793,761) $ (606,883) $ (424,479) Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (121,878) (33,001) 40,242 Unrealized gain (loss) on securities and derivatives:
Unrealized holding gain on marketable securities 327 16,576 23,103 Unrealized holding gain on cash flow derivatives - 48,180 52,112
Other adjustments to comprehensive income (loss) (11,438) 6,732 1,135 Reclassification adjustment for realized (gain) loss on securities included
in net loss 3,317 (83,752) 2,045 Other comprehensive income (loss) (129,672) (45,265) 118,637 Comprehensive loss (923,433) (652,148) (305,842)
Less amount attributable to noncontrolling interest (21,080) (2,476) 5,878 Comprehensive loss attributable to the Company $ (902,353) $ (649,672) $ (311,720) Net loss attributable to the Company per common share:
Basic (9.46) (7.31) (5.23) Weighted average common shares outstanding — Basic $ 83,941 $ 83,364 $ 82,745 Diluted (9.46) (7.31) (5.23) Weighted average common shares outstanding — Diluted $ 83,941 $ 83,364 $ 82,745
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
Common Shares
Non-controlling
Interest
Controlling Interest (In thousands, except share data)
CommonStock
Additional
Paid-inCapital
Accumulated Deficit
Accumulated Other
ComprehensiveIncome (Loss)
TreasuryStock
Class CShares
Class BShares
Class AShares Total
Balances at December 31, 2011 58,967,502 555,556 24,106,139 $ 521,794 $ 83 $2,132,368 $ (9,857,267) $ (266,043) $(2,876) $(7,471,941) Net income (loss) - - - 13,289 - - (424,479) - - (411,190) Issuance (forfeiture) of restricted
Balances at December 31, 2014 58,967,502 555,556 29,307,583 $ 224,140 $ 89 $2,102,789 $(11,682,390) $ (308,590) $(1,246) $(9,665,208)
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2014 2013 2012 Cash flows from operating activities:
Consolidated net loss $ (762,158) $ (583,517) $ (411,190) Reconciling items:
Impairment charges 24,176 16,970 37,651 Depreciation and amortization 710,898 730,828 729,285 Deferred taxes 33,923 (158,170) (304,611) Provision for doubtful accounts 14,167 20,243 11,715 Amortization of deferred financing charges and note discounts,
net 89,701 124,342 164,097 Share-based compensation 10,713 16,715 28,540 Gain on disposal of operating and fixed assets (44,512) (22,998) (48,127) (Gain) loss on marketable securities — (130,879) 4,580 Equity in (earnings) loss of nonconsolidated affiliates 9,416 77,696 (18,557) Loss on extinguishment of debt 43,347 87,868 254,723 Other reconciling items, net (14,325) 19,904 14,234 Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:Increase in accounts receivable (13,898) (29,605) (34,238) Increase in accrued expenses 31,049 26,105 34,874 Increase (decrease) in accounts payable 6,404 (2,620) 13,863 Increase in accrued interest 88,560 16,014 20,223 Increase in deferred income 11,288 7,508 33,482 Changes in other operating assets and liabilities 6,367 (3,532) (45,412)
Net cash provided by operating activities 245,116 212,872 485,132 Cash flows from investing activities:
Proceeds from sale of other investments 236,618 135,571 — Purchases of businesses 841 (97) (50,116) Purchases of property, plant and equipment (318,164) (324,526) (390,280) Proceeds from disposal of assets 10,273 81,598 59,665 Purchases of other operating assets (4,541) (21,532) (14,826) Change in other, net (13,709) (4,379) (1,464)
Net cash used for investing activities (88,682) (133,365) (397,021) Cash flows from financing activities:
Draws on credit facilities 68,010 272,252 604,563 Payments on credit facilities (315,682) (27,315) (1,931,419) Proceeds from long-term debt 2,062,475 575,000 4,917,643 Payments on long-term debt (2,099,101) (1,248,860) (3,346,906) Payments to repurchase noncontrolling interests (48,750) (61,143) (7,040) Dividends and other payments to noncontrolling interests (40,027) (91,887) (251,665) Deferred financing charges (26,169) (18,390) (83,617) Change in other, net 1,243 4,461 3,092
Net cash used for financing activities (398,001) (595,882) (95,349) Effect of exchange rate changes on cash (9,560) (484) 3,566 Net decrease in cash and cash equivalents (251,127) (516,859) (3,672) Cash and cash equivalents at beginning of period 708,151 1,225,010 1,228,682 Cash and cash equivalents at end of period $ 457,024 $ 708,151 $ 1,225,010 SUPPLEMENTAL DISCLOSURES:Cash paid during the year for interest $ 1,540,860 $ 1,543,455 $ 1,381,396 Cash paid during the year for taxes 53,074 50,934 52,517
See Notes to Consolidated Financial Statements
4
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of Business
iHeartMedia, Inc. (“the Company”) was formed in May 2007 by private equity funds sponsored by Bain Capital Partners, LLC and Thomas H. Lee Partners,L.P. (together, the “Sponsors”) for the purpose of acquiring the business of iHeartCommunications, Inc., a Texas company (iHeartCommunications”). Theacquisition was completed on July 30, 2008 pursuant to the Agreement and Plan of Merger, dated November 16, 2006, as amended on April 18, 2007,May 17, 2007 and May 13, 2008 (the “Merger Agreement”).
The Company’s reportable operating segments are iHeartMedia (“iHM”), Americas outdoor advertising (“Americas outdoor”), and International outdooradvertising (“International outdoor”). The iHM segment provides media and entertainment services via broadcast and digital delivery. The Americas outdoorand International outdoor segments provide outdoor advertising services in their respective geographic regions using various digital and traditional displaytypes. Included in the “Other” category are the Company’s media representation business, Katz Media Group, as well as other general support services andinitiatives, which are ancillary to its other businesses.
Recent Developments
During the first quarter of 2015, the Company reevaluated its segment reporting and determined that its Latin American operations should be managed by itsAmericas outdoor leadership team. As a result, the operations of Latin America are no longer reflected within the Company’s International outdoor segmentand are included in the results of its Americas outdoor segment. In addition, the Company reorganized a portion of its national representation business suchthat the cost of sales personnel for iHM radio stations are now included in the iHM segment and its national representation business no longer charges iHMfor intercompany cost allocations. Accordingly, the Company has recast the corresponding segment disclosures for prior periods to include Latin Americawithin the Americas outdoor segment and has also recast the corresponding segment disclosures to reflect internal representation services as direct expensesof iHM.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management tomake estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes including,but not limited to, legal, tax and insurance accruals. The Company bases its estimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. Also included in the consolidated financial statements areentities for which the Company has a controlling financial interest or is the primary beneficiary. Investments in companies in which the Company owns20 percent to 50 percent of the voting common stock or otherwise exercises significant influence over operating and financial policies of the Company areaccounted for using the equity method of accounting. All significant intercompany accounts have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the 2014 presentation.
The Company is the beneficiary of two trusts created to comply with Federal Communications Commission (“FCC”) ownership rules. The radio stationsowned by the trusts are managed by independent trustees. The trustees are marketing these stations for sale, and the stations will have to be sold unless anystations may be owned by the Company under then-current FCC rules, in which case the trusts will be terminated with respect to such stations. The trustagreements stipulate that the Company must fund any operating shortfalls of the trust activities, and any excess cash flow generated by the trusts isdistributed to the Company. The Company is also the beneficiary of proceeds from the sale of stations held in the trusts. The Company consolidates the trustsin accordance with ASC 810-10, which requires an enterprise involved with variable interest entities to perform an analysis to determine whether theenterprise’s variable interest or interests give it a controlling financial interest in the variable interest entity, as the trusts were determined to be a variableinterest entity and the Company is the primary beneficiary under the trusts.
5
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount, net of reserves for sales returns and allowances, and allowances for doubtful accounts. TheCompany evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where it is aware of a specific customer’sinability to meet its financial obligations, it records a specific reserve to reduce the amounts recorded to what it believes will be collected. For all othercustomers, it recognizes reserves for bad debt based on historical experience of bad debts as a percent of revenue for each business unit, adjusted for relativeimprovements or deteriorations in the agings and changes in current economic conditions. The Company believes its concentration of credit risk is limiteddue to the large number and the geographic diversification of its customers.
Business Combinations
The Company accounts for its business combinations under the acquisition method of accounting. The total cost of an acquisition is allocated to theunderlying identifiable net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the netassets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and ofteninvolves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset livesand market multiples, among other items. Various acquisition agreements may include contingent purchase consideration based on performance requirementsof the investee. The Company accounts for these payments in conformity with the provisions of ASC 805-20-30, which establish the requirements related torecognition of certain assets and liabilities arising from contingencies.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method at rates that, in the opinion of management, areadequate to allocate the cost of such assets over their estimated useful lives, which are as follows:
Buildings and improvements – 10 to 39 yearsStructures – 5 to 15 yearsTowers, transmitters and studio equipment – 7 to 20 yearsFurniture and other equipment – 3 to 20 yearsLeasehold improvements – shorter of economic life or lease term assuming renewal periods, if appropriate
For assets associated with a lease or contract, the assets are depreciated at the shorter of the economic life or the lease or contract term, assuming renewalperiods, if appropriate. Expenditures for maintenance and repairs are charged to operations as incurred, whereas expenditures for renewal and betterments arecapitalized.
The Company tests for possible impairment of property, plant, and equipment whenever events and circumstances indicate that depreciable assets might beimpaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. When specific assetsare determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current fair market value.
Land Leases
Most of the Company’s outdoor advertising structures are located on leased land. Americas outdoor land leases are typically paid in advance for periodsranging from one to 12 months. International outdoor land leases are paid both in advance and in arrears, for periods ranging from one to 12 months. Mostinternational street furniture display faces are operated through contracts with municipalities for up to 20 years. The leased land and street furniture contractsoften include a percent of revenue to be paid along with a base rent payment. Prepaid land leases are recorded as an asset and expensed ratably over therelated rental term and rent payments in arrears are recorded as an accrued liability.
6
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible Assets
The Company’s indefinite-lived intangible assets include FCC broadcast licenses in its iHM segment and billboard permits in its Americas outdooradvertising segment. The Company’s indefinite-lived intangible assets are not subject to amortization, but are tested for impairment at least annually. TheCompany tests for possible impairment of indefinite-lived intangible assets whenever events or changes in circumstances, such as a significant reduction inoperating cash flow or a dramatic change in the manner for which the asset is intended to be used indicate that the carrying amount of the asset may not berecoverable.
The Company performs its annual impairment test for its FCC licenses and permits using a direct valuation technique as prescribed in ASC 805-20-S99. TheCompany engages Mesirow Financial Consulting LLC (“Mesirow Financial”), a third party valuation firm, to assist the Company in the development of theseassumptions and the Company’s determination of the fair value of its FCC licenses and permits.
Other intangible assets include definite-lived intangible assets and permanent easements. The Company’s definite-lived intangible assets include primarilytransit and street furniture contracts, talent and representation contracts, customer and advertiser relationships, and site-leases, all of which are amortized overthe respective lives of the agreements, or over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cashflows. The Company periodically reviews the appropriateness of the amortization periods related to its definite-lived intangible assets. These assets arerecorded at cost. Permanent easements are indefinite-lived intangible assets which include certain rights to use real property not owned by the Company.
The Company tests for possible impairment of other intangible assets whenever events and circumstances indicate that they might be impaired and theundiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. When specific assets are determined tobe unrecoverable, the cost basis of the asset is reduced to reflect the current fair market value.
Goodwill
At least annually, the Company performs its impairment test for each reporting unit’s goodwill. The Company uses a discounted cash flow model todetermine if the carrying value of the reporting unit, including goodwill, is less than the fair value of the reporting unit. The Company identified its reportingunits in accordance with ASC 350-20-55. The U.S. radio markets are aggregated into a single reporting unit and the Company’s U.S. outdoor advertisingmarkets are aggregated into a single reporting unit for purposes of the goodwill impairment test. The Company also determined that within its Americasoutdoor segment, Canada constitutes a separate reporting unit and each country in its International outdoor segment constitutes a separate reporting unit. TheCompany had no impairment of goodwill in 2014. The Company recognized a non-cash impairment charge to goodwill of $10.7 million based on decliningfuture cash flows expected in one country in the International outdoor segment for 2013. The Company had no impairment of goodwill for 2012.
Nonconsolidated Affiliates
In general, investments in which the Company owns 20 percent to 50 percent of the common stock or otherwise exercises significant influence over theinvestee are accounted for under the equity method. The Company does not recognize gains or losses upon the issuance of securities by any of its equitymethod investees. The Company reviews the value of equity method investments and records impairment charges in the statement of operations as acomponent of “Equity in earnings (loss) of nonconsolidated affiliates” for any decline in value that is determined to be other-than-temporary.
Other Investments
Other investments are composed primarily of equity securities. These securities are classified as available-for-sale or trading and are carried at fair value basedon quoted market prices. Securities are carried at historical value when quoted market prices are unavailable. The net unrealized gains or losses on theavailable-for-sale securities, net of tax, are reported in accumulated other comprehensive loss as a component of shareholders’ deficit. In addition, theCompany holds investments that do not have quoted market prices. The Company periodically assesses the value of available-for-sale and non-marketablesecurities and records impairment charges in the statement of comprehensive loss for any decline in value that is determined to be other-than-temporary. Theaverage cost method is used to compute the realized gains and losses on sales of equity securities.
7
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company periodically assesses the value of its available-for-sale securities. Based on these assessments, there were no impairments during the yearsended December 31, 2014 and 2013. The Company concluded that other-than-temporary impairments existed at December 31, 2012 and recorded a noncashimpairment charge of $4.6 million during the year ended December 31, 2012. Such charge is recorded on the statement of comprehensive loss in “Gain (Loss)on marketable securities”.
Derivative Instruments and Hedging Activities
Prior to the expiration of the Company’s interest rate swap agreement on September 30, 2013, the provisions of ASC 815-10 required the Company torecognize it as either an asset or liability in the consolidated balance sheet at fair value. The accounting for changes in the fair value of a derivativeinstrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. Theinterest rate swap was designated and qualified as a hedging instrument, and was characterized as a cash flow hedge. The Company formally documented allrelationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedgetransactions. The Company formally assessed, both at inception and at least quarterly thereafter prior to expiration, whether the derivatives that were used inhedging transactions were highly effective in offsetting changes in either the fair value or cash flows of the hedged item.
Financial Instruments
Due to their short maturity, the carrying amounts of accounts and notes receivable, accounts payable, accrued liabilities, and short-term borrowingsapproximated their fair values at December 31, 2014 and 2013.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differencesbetween financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income inthe periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if theCompany believes it is more likely than not that some portion or the entire asset will not be realized. Generally all earnings from the Company’s foreignoperations are permanently reinvested and not distributed. The Company has not provided U.S. federal income taxes for temporary differences with respect toinvestments in foreign subsidiaries, which at December 31, 2014 currently result in tax basis amounts greater than the financial reporting basis. It is notapparent that these unrecognized deferred tax assets will reverse in the foreseeable future. If any excess cash held by our foreign subsidiaries were needed tofund operations in the United States, we could presently repatriate available funds without a requirement to accrue or pay U.S. taxes. This is a result ofsignificant current and historic deficits in our foreign earnings and profits, which gives us flexibility to make future cash distributions as non-taxable returnsof capital. We regularly review our tax liabilities on amounts that may be distributed in future periods and provide for foreign withholding and other currentand deferred taxes on any such amounts. The determination of the amount of federal income taxes, if any, that might become due in the event that our foreignearnings are distributed is not practicable.
Revenue Recognition
iHM revenue is recognized as advertisements or programs are broadcast and is generally billed monthly. Outdoor advertising contracts typically coverperiods of a few weeks up to one year and are generally billed monthly. Revenue for outdoor advertising space rental is recognized ratably over the term ofthe contract. Advertising revenue is reported net of agency commissions. Agency commissions are calculated based on a stated percentage applied to grossbilling revenue for the Company’s media and entertainment and outdoor operations. Payments received in advance of being earned are recorded as deferredincome. Revenue arrangements may contain multiple products and services and revenues are allocated based on the relative fair value of each delivered itemand recognized in accordance with the applicable revenue recognition criteria for the specific unit of accounting.
8
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Barter transactions represent the exchange of advertising spots or display space for merchandise, services or other assets. These transactions are recorded atthe estimated fair market value of the advertising spots or display space or the fair value of the merchandise or services received, whichever is most readilydeterminable. Revenue is recognized on barter and trade transactions when the advertisements are broadcasted or displayed. Expenses are recorded ratablyover a period that estimates when the merchandise, service or other assets received is utilized, or when the event occurs. Barter and trade revenues andexpenses from continuing operations are included in consolidated revenue and selling, general and administrative expenses, respectively. Barter and traderevenues and expenses from continuing operations were as follows: (In millions) Years Ended December 31, 2014 2013 2012 Barter and trade revenues $ 69.4 $ 66.0 $ 56.5 Barter and trade expenses 68.1 58.5 58.8
Advertising Expense
The Company records advertising expense as it is incurred. Advertising expenses were $103.0 million, $133.7 million and $113.4 million for the years endedDecember 31, 2014, 2013 and 2012, respectively.
Share-Based Compensation
Under the fair value recognition provisions of ASC 718-10, share-based compensation cost is measured at the grant date based on the fair value of the award.For awards that vest based on service conditions, this cost is recognized as expense on a straight-line basis over the vesting period. For awards that will vestbased on market or performance conditions, this cost will be recognized when it becomes probable that the performance conditions will be satisfied.Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, amongother factors.
Foreign Currency
Results of operations for foreign subsidiaries and foreign equity investees are translated into U.S. dollars using the average exchange rates during the year.The assets and liabilities of those subsidiaries and investees are translated into U.S. dollars using the exchange rates at the balance sheet date. The relatedtranslation adjustments are recorded in a separate component of shareholders’ deficit, “Accumulated other comprehensive loss”. Foreign currency transactiongains and losses are included in operations.
New Accounting Pronouncements
During the first quarter of 2014, the Company adopted the Financial Accounting Standards Board’s (“FASB”) ASU No. 2013-04, Obligations Resulting fromJoint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This update provides guidance forthe recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of theobligation within the scope of this guidance is fixed at the reporting date. The amendments were effective for fiscal years (and interim periods within)beginning after December 15, 2013 and were to be applied retrospectively to all prior periods presented for such obligations that existed at the beginning ofan entity’s fiscal year of adoption. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
9
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the first quarter of 2014, the Company adopted the FASB’s ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment uponDerecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity of an Investment in a Foreign Entity. The amendments were effectiveprospectively for the fiscal years (and interim periods within) beginning after December 15, 2013 and provide clarification guidance for the release of thecumulative translation adjustment under current U.S. GAAP. The adoption of this guidance did not have a material effect on the Company’s consolidatedfinancial statements
During the first quarter of 2014, the Company adopted the FASB’s ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net OperatingLoss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update requires unrecognized tax benefits to be offset against a deferredtax asset for a net operating loss carryforward, similar tax loss or tax credit carryforward in certain situations. The amendments were effective prospectively forthe fiscal years (and interim periods within) beginning after December 15, 2013. The adoption of this guidance did not have a material effect on theCompany’s consolidated financial statements.
During the second quarter of 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard provides guidance for therecognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenuerecognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15,2016. The Company is currently evaluating the impact of the provisions of this new standard on its financial position and results of operations.
During the third quarter of 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That aPerformance Target Could Be Achieved after the Requisite Service Period. This new standard clarifies that a performance target in a share-basedcompensation award that could be achieved after an employee completes the requisite service period should be treated as a performance condition that affectsthe vesting of the award. The standard is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015.The Company is currently evaluating the impact of the provisions of this new standard on its financial position and results of operations.
NOTE 2 – PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE ASSETS AND GOODWILL
Acquisitions
The Company is the beneficiary of Aloha Station Trust, LLC (the “Aloha Trust”), which owns and operates radio stations which the Aloha Trust is required todivest in order to comply with Federal Communication Commission (“FCC”) media ownership rules, and which are being marketed for sale. During 2014, theAloha Trust completed a transaction in which it exchanged two radio stations for a portfolio of 29 radio stations. In this transaction the Company received 28radio stations. One radio station was placed into the Brunswick Station Trust, LLC in order to comply with FCC media ownership rules where it is beingmarketed for sale, and the Company is the beneficiary of this trust. The exchange was accounted for at fair value in accordance with ASC 805, BusinessCombinations. The disposal of these radio stations resulted in a gain on sale of $43.5 million, which is included in other operating income, net. Thisacquisition resulted in an aggregate increase in net assets of $49.2 million, which includes $13.8 million in indefinite-lived intangible assets, $10.2 millionin definite-lived intangibles, $8.1 million in property, plant and equipment and $0.8 million of assumed liabilities. In addition, the Company recognized$17.9 million of goodwill.
During 2012, a wholly owned subsidiary of the Company completed the acquisition of WOR-AM in New York City for $30.0 million and WFNX-FM inBoston for $14.5 million. These acquisitions resulted in an aggregate increase of $5.3 million to property plant and equipment, $15.2 million to intangibleassets and $24.7 million to goodwill, in addition to $0.7 million of assumed liabilities. Purchase accounting adjustments were finalized during 2013.
Dispositions
During 2013, the Company’s Americas outdoor segment divested certain outdoor advertising assets in Times Square for approximately $18.7 millionresulting in a gain of $12.2 million. In addition, iHM exercised a put option to sell five radio stations in the Green Bay market for approximately$17.6 million, resulting in a gain of $0.5 million. These net gains are included in “Other operating income, net.”
During 2012, the Company’s International outdoor segment sold its international neon business and its outdoor advertising business in Romania, resulting inan aggregate gain of $39.7 million included in “Other operating income, net.”
10
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property, Plant and Equipment
The Company’s property, plant and equipment consisted of the following classes of assets at December 31, 2014 and 2013, respectively. (In thousands) December 31,
2014 December 31,
2013 Land, buildings and improvements $ 731,925 $ 723,268 Structures 2,999,582 3,021,152 Towers, transmitters and studio equipment 453,044 440,612 Furniture and other equipment 536,255 473,995 Construction in progress 95,671 123,814
4,816,477 4,782,841 Less: accumulated depreciation 2,117,413 1,885,211 Property, plant and equipment, net $ 2,699,064 $ 2,897,630
The Company recorded an impairment charge related to property of $4.5 million during 2014. The Company recorded an impairment charge related to radiobroadcast equipment in one market of $1.3 million based on a sales agreement entered into during the fourth quarter of 2013. The Company recognized animpairment charge for outdoor advertising structures in its Americas outdoor segment of $1.7 million during 2012.
Indefinite-lived Intangible Assets
The Company’s indefinite-lived intangible assets consist of FCC broadcast licenses and billboard permits. FCC broadcast licenses are granted to radiostations for up to eight years under the Telecommunications Act of 1996 (the “Act”). The Act requires the FCC to renew a broadcast license if the FCC findsthat the station has served the public interest, convenience and necessity, there have been no serious violations of either the Communications Act of 1934 orthe FCC’s rules and regulations by the licensee, and there have been no other serious violations which taken together constitute a pattern of abuse. Thelicenses may be renewed indefinitely at little or no cost. The Company does not believe that the technology of wireless broadcasting will be replaced in theforeseeable future.
The Company’s billboard permits are granted for the right to operate an advertising structure at the specified location as long as the structure is in compliancewith the laws and regulations of each jurisdiction. The Company’s permits are located on owned land, leased land or land for which we have acquiredpermanent easements. In cases where the Company’s permits are located on leased land, the leases typically have initial terms of between 10 and 20 years andrenew indefinitely, with rental payments generally escalating at an inflation-based index. If the Company loses its lease, the Company will typically obtainpermission to relocate the permit or bank it with the municipality for future use. Due to significant differences in both business practices and regulations,billboards in the International outdoor segment are subject to long-term, finite contracts unlike the Company’s permits in the United States and Canada.Accordingly, there are no indefinite-lived intangible assets in the International outdoor segment.
The impairment tests for indefinite-lived intangible assets consist of a comparison between the fair value of the indefinite-lived intangible asset at the marketlevel with its carrying amount. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal tothat excess. After an impairment loss is recognized, the adjusted carrying amount of the indefinite-lived asset is its new accounting basis. The fair value of theindefinite-lived asset is determined using the direct valuation method as prescribed in ASC 805-20-S99. Under the direct valuation method, the fair value ofthe indefinite-lived assets is calculated at the market level as prescribed by ASC 350-30-35. The Company engaged Mesirow Financial, a third-partyvaluation firm, to assist it in the development of the assumptions and the Company’s determination of the fair value of its indefinite-lived intangible assets.
The application of the direct valuation method attempts to isolate the income that is properly attributable to the indefinite-lived intangible asset alone (thatis, apart from tangible and identified intangible assets and goodwill). It is based upon modeling a hypothetical “greenfield” build-up to a “normalized”enterprise that, by design, lacks inherent goodwill and whose only other assets have essentially been paid for (or added) as part of the build-up process. TheCompany forecasts revenue, expenses, and cash flows over a ten-year period for each of its markets in its application of the direct valuation method. TheCompany also calculates a “normalized” residual year which represents the perpetual cash flows of each market. The residual year cash flow was capitalizedto arrive at the terminal value of the licenses in each market.
11
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the direct valuation method, it is assumed that rather than acquiring indefinite-lived intangible assets as part of a going concern business, the buyerhypothetically develops indefinite-lived intangible assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-upcosts during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flowmodel which results in value that is directly attributable to the indefinite-lived intangible assets.
The key assumptions using the direct valuation method are market revenue growth rates, market share, profit margin, duration and profile of the build-upperiod, estimated start-up capital costs and losses incurred during the build-up period, the risk-adjusted discount rate and terminal values. This data ispopulated using industry normalized information representing an average FCC license or billboard permit within a market.
Annual Impairment Test to FCC Licenses and Billboard Permits
The Company performs its annual impairment test on October 1 of each year.
During 2014, the Company recognized a $15.7 million impairment charge related to FCC licenses in eleven markets due to changes in the revenue growthforecasts and margins for those markets. During 2013, the Company recognized a $2.0 million impairment charge related to FCC licenses in two markets dueto changes in the discount rates and weight-average cost of capital for those markets. In addition, the Company recognized a $2.5 million impairment chargerelated to billboard permits in a certain market due to increased start-up costs for that market exceeding market value. During 2012, the Company recognizeda $35.9 million impairment charge related to billboard permits in certain markets due to a change in the Company’s forecast of revenue growth within themarkets. There was no impairment of FCC licenses during 2012.
Other Intangible Assets
Other intangible assets include definite-lived intangible assets and permanent easements. The Company’s definite-lived intangible assets include primarilytransit and street furniture contracts, talent and representation contracts, customer and advertiser relationships, and site-leases, all of which are amortized overthe respective lives of the agreements, or over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cashflows. Permanent easements are indefinite-lived intangible assets which include certain rights to use real property not owned by the Company. During 2014,the Company recognized a $3.4 million impairment charge to easements in three markets primarily due to declining revenue forecasts. There were noimpairments of other intangible assets for the years ended December 31, 2013 and 2012.
The following table presents the gross carrying amount and accumulated amortization for each major class of other intangible assets at December 31, 2014and 2013, respectively: (In thousands) December 31, 2014 December 31, 2013
Gross Carrying
Amount AccumulatedAmortization
Gross CarryingAmount
AccumulatedAmortization
Transit, street furniture and other outdoor contractual rights $ 716,723 $(476,523) $ 777,521 $(464,548) Customer / advertiser relationships 1,222,518 (765,596) 1,212,745 (645,988) Talent contracts 319,384 (223,936) 319,617 (195,403) Representation contracts 238,313 (206,338) 252,961 (200,058) Permanent easements 171,271 - 173,753 - Other 388,160 (177,249) 387,405 (151,459)
Total $ 3,056,369 $(1,849,642) $ 3,124,002 $(1,657,456)
Total amortization expense related to definite-lived intangible assets was $263.4 million, $289.0 million and $300.0 million for the years endedDecember 31, 2014, 2013 and 2012, respectively.
12
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As acquisitions and dispositions occur in the future, amortization expense may vary. The following table presents the Company’s estimate of amortizationexpense for each of the five succeeding fiscal years for definite-lived intangible assets: (In thousands)2015 $ 236,019 2016 219,485 2017 197,061 2018 127,730 2019 42,274
Annual Impairment Test to Goodwill
The Company performs its annual impairment test on October 1 of each year. Each of the Company’s U.S. radio markets and outdoor advertising markets arecomponents. The U.S. radio markets are aggregated into a single reporting unit and the U.S. outdoor advertising markets are aggregated into a singlereporting unit for purposes of the goodwill impairment test using the guidance in ASC 350-20-55. The Company also determined that within its Americasoutdoor and International outdoor segments, each country constitutes a separate reporting unit.
The goodwill impairment test is a two-step process. The first step, used to screen for potential impairment, compares the fair value of the reporting unit withits carrying amount, including goodwill. If applicable, the second step, used to measure the amount of the impairment loss, compares the implied fair value ofthe reporting unit goodwill with the carrying amount of that goodwill.
Each of the Company’s reporting units is valued using a discounted cash flow model which requires estimating future cash flows expected to be generatedfrom the reporting unit, discounted to their present value using a risk-adjusted discount rate. Terminal values were also estimated and discounted to theirpresent value. Assessing the recoverability of goodwill requires the Company to make estimates and assumptions about sales, operating margins, growth ratesand discount rates based on its budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherentuncertainties related to these factors and management’s judgment in applying these factors.
In 2014, the Company concluded no goodwill impairment was required. In 2013, the Company concluded no goodwill impairment was required for iHM andAmericas outdoor. Based on declining future cash flows expected in one country in the International outdoor segment, the Company recognized a non-cashimpairment charge to goodwill of $10.7 million. The Company recognized no goodwill impairment for the year ended December 31, 2012.
The following table presents the changes in the carrying amount of goodwill in each of the Company’s reportable segments: (In thousands)
iHM Americas Outdoor
Advertising
International Outdoor
Advertising Other Consolidated Balance as of December 31, 2012 $3,236,688 $ 585,307 $ 276,941 $ 117,149 $ 4,216,085
Balance as of December 31, 2013 $3,234,807 $ 585,227 $ 264,907 $ 117,246 $ 4,202,187 Acquisitions 17,900 - - 299 18,199 Foreign currency - (653) (32,369) - (33,022) Other 60 - - - 60
Balance as of December 31, 2014 $3,252,767 $ 584,574 $ 232,538 $ 117,545 $ 4,187,424
The balance at December 31, 2012 is net of cumulative impairments of $3.5 billion, $2.7 billion, $250.5 million and $212.0 million in the Company’s iHM,Americas outdoor, International outdoor and Other segments, respectively.
13
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 – INVESTMENTS
The Company’s most significant investments in nonconsolidated affiliates are listed below:
Australian Radio Network
The Company owned a fifty-percent (50%) interest in Australian Radio Network (“ARN”), an Australian company that owns and operates radio stations inAustralia and New Zealand. An impairment charge of $95.4 million was recorded during the fourth quarter of 2013 to write down the investment to itsestimated fair value. On February 18, 2014, a subsidiary of the Company sold its 50% interest in ARN, recognizing a loss on the sale of $2.4 million and$11.5 million of foreign exchange losses that were reclassified from accumulated other comprehensive income at the date of the sale.
Buspak
The Company owned a 50% interest in Buspak, a bus advertising company in Hong Kong. On July 18, 2014, a subsidiary of the Company sold its 50%interest in Buspak, recognizing a gain on the sale of $4.5 million.
Summarized Financial Information
The following table summarizes the Company’s investments in nonconsolidated affiliates:
(In thousands) ARN
All Others Total
Balance at December 31, 2012 $ 353,062 $ 17,850 $ 370,912 Cash advances (repayments) - 3,051 3,051 Acquisitions of investments, net - 1,354 1,354 Equity in loss (75,318) (2,378) (77,696) Foreign currency translation adjustment (37,068) 4 (37,064) Distributions received (19,926) (1,750) (21,676) Other - (76) (76)
Balance at December 31, 2013 $ 220,750 $ 18,055 $ 238,805 Cash advances (repayments) - 3,452 3,452 Acquisitions of investments, net - 1,811 1,811 Equity in earnings (loss) (12,678) 3,262 (9,416) Foreign currency transaction adjustment 1,449 77 1,526 Distributions received (228) (1,000) (1,228) Proceeds on sale (220,783) (15,820) (236,603) Other 11,490 (344) 11,146
Balance at December 31, 2014 $ - $ 9,493 $ 9,493
The investments in the table above are not consolidated, but are accounted for under the equity method of accounting, whereby the Company records itsinvestments in these entities in the balance sheet as “Other assets.” The Company’s interests in their operations are recorded in the statement ofcomprehensive loss as “Equity in earnings (loss) of nonconsolidated affiliates.”
NOTE 4 – ASSET RETIREMENT OBLIGATIONThe Company’s asset retirement obligation is reported in “Other long-term liabilities” with the current portion recorded in “Accrued liabilities” and relates toits obligation to dismantle and remove outdoor advertising displays and radio broadcasting towers from leased land and to reclaim the site to its originalcondition upon the termination or non-renewal of a lease or contract. When the liability is recorded, the cost is capitalized as part of the related long-livedassets’ carrying value. Due to the high rate of lease renewals over a long period of time, the calculation assumes that all related assets will be removed at someperiod over the next 50 years. An estimate of third-party cost information is used with respect to the dismantling of the structures and the reclamation of thesite. The interest rate used to calculate the present value of such costs over the retirement period is based on an estimated risk adjusted credit rate for the sameperiod.
14
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the activity related to the Company’s asset retirement obligation: (In thousands) Years Ended December 31, 2014 2013 Beginning balance $ 59,380 $ 56,849
Adjustment due to changes in estimates (5,391) 806 Accretion of liability 7,858 5,106 Liabilities settled (5,802) (3,323) Foreign Currency (1,834) (58)
Ending balance $ 54,211 $ 59,380
NOTE 5 – LONG-TERM DEBT
Long-term debt at December 31, 2014 and 2013 consisted of the following:
(In thousands) December 31,
2014 December 31,
2013 Senior Secured Credit Facilities 7,231,222 8,225,754 Receivables Based Facility Due 2017 - 247,000 Priority Guarantee Notes 5,324,815 4,324,815 Subsidiary Revolving Credit Facility Due 2018 - - Other Secured Subsidiary Debt 19,257 21,124 Total Consolidated Secured Debt 12,575,294 12,818,693 10.75% Senior Cash Pay Notes Due 2016 - 94,304 11.00%/11.75% Senior Toggle Notes Due 2016 - 127,941 14.0% Senior Notes Due 2021 1,661,697 1,404,202 iHeartCommunications Legacy Notes 667,900 1,436,455 10.0% Senior Notes Due 2018 730,000 - Subsidiary Senior Notes 4,925,000 4,925,000 Other Subsidiary Debt 1,024 10 Purchase accounting adjustments and original issue discount (234,897) (322,392)
20,326,018 20,484,213 Less: current portion 3,604 453,734 Total long-term debt $ 20,322,414 $ 20,030,479
The Company’s weighted average interest rates at December 31, 2014 and 2013 were 8.1% and 7.6%, respectively. The aggregate market value of theCompany’s debt based on market prices for which quotes were available was approximately $19.7 billion and $20.5 billion at December 31, 2014 and 2013,respectively. Under the fair value hierarchy established by ASC 820-10-35, the fair market value of the Company’s debt is classified as either Level 1 orLevel 2.
Senior Secured Credit Facilities
As of December 31, 2014, iHeartCommunications had senior secured credit facilities consisting of:
(In thousands) Maturity
Date December 31,
2014 December 31,
2013 Term Loan B 1/29/2016 $ 916,061 1,890,978 Term Loan C 1/29/2016 15,161 34,776 Term Loan D 1/30/2019 5,000,000 5,000,000 Term Loan E 7/30/2019 1,300,000 1,300,000
Total Senior Secured Credit Facilities$ 7,231,222 $ 8,225,754
iHeartCommunications is the primary borrower under the senior secured credit facilities, except that certain of its domestic restricted subsidiaries are co-borrowers under a portion of the term loan facilities.
15
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest Rate and Fees
Borrowings under iHeartCommunications’ senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at iHeartCommunications’option, either (i) a base rate determined by reference to the higher of (A) the prime lending rate publicly announced by the administrative agent or (B) theFederal funds effective rate from time to time plus 0.50%, or (ii) a Eurocurrency rate determined by reference to the costs of funds for deposits for the interestperiod relevant to such borrowing adjusted for certain additional costs.
The margin percentages applicable to the term loan facilities are the following percentages per annum: • with respect to loans under the Term Loan B and Term Loan C – asset sale facility, (i) 2.65%, in the case of base rate loans and (ii) 3.65%, in
the case of Eurocurrency rate loans; and
• with respect to loans under the Term Loan D, (i) 5.75% in the case of base rate loans and (ii) 6.75% in the case of Eurocurrency rate loans; and
• with respect to loans under the Term Loan E, (i) 6.50% in the case of base rate loans and (ii) 7.50% in the case of Eurocurrency rate loans.
The margin percentages are subject to adjustment based upon iHeartCommunications’ leverage ratio.
Collateral and Guarantees
The senior secured credit facilities are guaranteed by iHeartCommunications and each of iHeartCommunications’ existing and future material wholly-owneddomestic restricted subsidiaries, subject to certain exceptions.
All obligations under the senior secured credit facilities, and the guarantees of those obligations, are secured, subject to permitted liens, including prior lienspermitted by the indenture governing the iHeartCommunications senior notes, and other exceptions, by: • a lien on the capital stock of iHeartCommunications;
• 100% of the capital stock of any future material wholly-owned domestic license subsidiary that is not a “Restricted Subsidiary” under theindenture governing the iHeartCommunications senior notes;
• certain assets that do not constitute “principal property” (as defined in the indenture governing the iHeartCommunications senior notes);
• certain specified assets of iHeartCommunications and the guarantors that constitute “principal property” (as defined in the indenturegoverning the iHeartCommunications senior notes) securing obligations under the senior secured credit facilities up to the maximum amountpermitted to be secured by such assets without requiring equal and ratable security under the indenture governing the iHeartCommunicationssenior notes; and
• a lien on the accounts receivable and related assets securing iHeartCommunications’ receivables based credit facility that is junior to the liensecuring iHeartCommunications’ obligations under such credit facility.
Certain Covenants and Events of Default
The senior secured credit facilities include negative covenants that, subject to significant exceptions, limit iHeartCommunications’ ability and the ability ofits restricted subsidiaries to, among other things: • incur additional indebtedness; • create liens on assets; • engage in mergers, consolidations, liquidations and dissolutions; • sell assets; • pay dividends and distributions or repurchase iHeartCommunications’ capital stock;
16
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
• make investments, loans, or advances; • prepay certain junior indebtedness; • engage in certain transactions with affiliates; • amend material agreements governing certain junior indebtedness; and • change lines of business.
Receivables Based Credit Facility
As of December 31, 2014, there were no borrowings outstanding under iHeartCommunications’ receivables based credit facility.
The receivables based credit facility provides revolving credit commitments of $535.0 million, subject to a borrowing base. The borrowing base at any timeequals 90% of the eligible accounts receivable of iHeartCommunications and certain of its subsidiaries. The receivables based credit facility includes a letterof credit sub-facility and a swingline loan sub-facility.
iHeartCommunications and certain subsidiary borrowers are the borrowers under the receivables based credit facility. iHeartCommunications has the abilityto designate one or more of its restricted subsidiaries as borrowers under the receivables based credit facility. The receivables based credit facility loans areavailable in U.S. dollars and letters of credit are available in a variety of currencies including U.S. dollars, Euros, Pounds Sterling, and Canadian dollars.
Interest Rate and Fees
Borrowings under the receivables based credit facility bear interest at a rate per annum equal to an applicable margin plus, at iHeartCommunications’ option,either (i) a base rate determined by reference to the highest of (a) the prime rate of Citibank, N.A. and (b) the Federal Funds rate plus 0.50% or (ii) aEurocurrency rate determined by reference to the rate (adjusted for statutory reserve requirements for Eurocurrency liabilities) for Eurodollar deposits for theinterest period relevant to such borrowing. The applicable margin for borrowings under the receivables based credit facility ranges from 1.50% to 2.00% forEurocurrency borrowings and from 0.50% to 1.00% for base-rate borrowings, depending on average daily excess availability under the receivables basedcredit facility during the prior fiscal quarter.
In addition to paying interest on outstanding principal under the receivables based credit facility, iHeartCommunications is required to pay a commitmentfee to the lenders under the receivables based credit facility in respect of the unutilized commitments thereunder. The commitment fee rate ranges from 0.25%to 0.375% per annum dependent upon average unused commitments during the prior quarter. iHeartCommunications must also pay customary letter of creditfees.
Maturity
Borrowings under the receivables based credit facility will mature, and lending commitments thereunder will terminate, on the fifth anniversary of theeffectiveness of the receivables based credit facility (December 24, 2017), provided that, (a) the maturity date will be October 31, 2015 if on October 30,2015, greater than $500.0 million in aggregate principal amount is owing under certain of iHeartCommunications’ term loan credit facilities, (b) the maturitydate will be May 3, 2016 if on May 2, 2016 greater than $500.0 million aggregate principal amount of iHeartCommunications’ 10.75% senior cash pay notesdue 2016 and 11.00%/11.75% senior toggle notes due 2016 are outstanding and (c) in the case of any debt under clauses (a) and (b) that is amended orrefinanced in any manner that extends the maturity date of such debt to a date that is on or before the date that is five years after the effectiveness of thereceivables based credit facility, the maturity date will be one day prior to the maturity date of such debt after giving effect to such amendment or refinancingif greater than $500,000,000 in aggregate principal amount of such debt is outstanding.
Guarantees and Security
The facility is guaranteed by, subject to certain exceptions, the guarantors of iHeartCommunications’ senior secured credit facilities. All obligations underthe receivables based credit facility, and the guarantees of those obligations, are secured by a perfected security interest in all of iHeartCommunications’ andall of the guarantors’ accounts receivable and related assets and proceeds thereof that is senior to the security interest of iHeartCommunications’ seniorsecured credit facilities in such accounts receivable and related assets and proceeds thereof, subject to permitted liens, including prior liens permitted by theindenture governing certain of iHeartCommunications’ Legacy Notes, and certain exceptions.
17
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain Covenants and Events of Default
The receivables based credit facility includes negative covenants that, subject to significant exceptions, limit iHeartCommunications’ ability and the abilityof its restricted subsidiaries to, among other things: • incur additional indebtedness;
• create liens on assets;
• engage in mergers, consolidations, liquidations and dissolutions;
• sell assets;
• pay dividends and distributions or repurchase capital stock;
• make investments, loans, or advances;
• prepay certain junior indebtedness;
• engage in certain transactions with affiliates;
• amend material agreements governing certain junior indebtedness; and
• change lines of business.
Priority Guarantee Notes
As of December 31, 2014, iHeartCommunications had outstanding Priority Guarantee Notes consisting of:
(In thousands)
Maturity Date Interest Rate Interest Payment Terms December 31,
2014 December 31,
2013 9.0% Priority Guarantee Notes due 2019
12/15/2019
9.0%
Payable semi-annually inarrears on June 15 and
December 15 of each year
$ 1,999,815
1,999,815
9.0% Priority Guarantee Notes due 2021
3/1/2021
9.0%
Payable semi-annually inarrears on March 1 and
September 1 of each year
1,750,000
1,750,000
11.25% Priority Guarantee Notes due 2021
3/1/2021
11.25%
Payable semi-annually onMarch 1 and September 1
of each year
575,000
575,000
9.0% Priority Guarantee Notes due 2022
9/15/2022
9.0%
Payable semi-annually inarrears on March 15 and
September 15 of each year
1,000,000
-
Total Priority Guarantee Notes $ 5,324,815 4,324,815
Guarantees and Security
The Priority Guarantee Notes are iHeartCommunications’ senior obligations and are fully and unconditionally guaranteed, jointly and severally, on a seniorbasis by the guarantors named in the indentures. The Priority Guarantee Notes and the guarantors’ obligations under the guarantees are secured by (i) a lienon (a) the capital stock of iHeartCommunications and (b) certain property and related assets that do not constitute “principal property,” in each case equal inpriority to the liens securing the obligations under iHeartCommunications’ senior secured credit facilities and (ii) a lien on the accounts receivable andrelated assets securing iHeartCommunications’ receivables based credit facility junior in priority to the lien securing iHeartCommunications’ obligationsthereunder, subject to certain exceptions. In addition to the collateral granted to secure the Priority Guarantee Notes due 2019, the collateral agent and thetrustee for the Priority Guarantee Notes due 2019 entered into an agreement with the administrative agent for the lenders under the senior secured creditfacilities to turn over to the trustee under the Priority Guarantee Notes due 2019, for the benefit of the holders of the Priority Guarantee Notes due 2019, a prorata share of any recovery received on account of the principal properties, subject to certain terms and conditions.
18
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Redemptions
iHeartCommunications may redeem the Priority Guarantee Notes at its option, in whole or part, at redemption prices set forth in the indentures, plus accruedand unpaid interest to the redemption dates plus applicable premiums.
Certain Covenants
The indentures governing the Priority Guarantee Notes contain covenants that limit iHeartCommunications’ ability and the ability of its restrictedsubsidiaries to, among other things: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issue certainpreferred stock; (iii) modify any of iHeartCommunications’ existing senior notes; (iv) transfer or sell assets; (v) engage in certain transactions with affiliates;(vi) create restrictions on dividends or other payments by the restricted subsidiaries; and (vii) merge, consolidate or sell substantially all ofiHeartCommunications’ assets. The indentures contain covenants that limit iHeartMedia Capital I, LLC’s and iHeartCommunications’ ability and the abilityof its restricted subsidiaries to, among other things: (i) create liens on assets and (ii) materially impair the value of the security interests taken with respect tothe collateral for the benefit of the notes collateral agent and the holders of the Priority Guarantee Notes. The indentures also provide for customary events ofdefault.
Subsidiary Senior Revolving Credit Facility Due 2018
During the third quarter of 2013, CCOH entered into a five-year senior secured revolving credit facility with an aggregate principal amount of $75.0 million.The revolving credit facility may be used for working capital needs, to issue letters of credit and for other general corporate purposes. At December 31, 2014,there were no amounts outstanding under the revolving credit facility, and $62.2 million of letters of credit under the revolving credit facility, which reduceavailability under the facility.
Senior Cash Pay Notes and Senior Toggle Notes
As of December 31, 2014, iHeartCommunications had no principal amounts outstanding of 10.75% senior cash pay notes due 2016 and 11.00%/11.75%senior toggle notes due 2016. In August 2014, iHeartCommunications fully redeemed the remaining notes with proceeds from the issuance of 14.0% SeniorNotes due 2021.
14.0% Senior Notes due 2021
As of December 31, 2014, iHeartCommunications had outstanding approximately $1.66 billion of aggregate principal amount of 14.0% Senior Notes due2021 (net of $423.4 million principal amount issued to, and held by, a subsidiary of iHeartCommunications).
The Senior Notes due 2021 mature on February 1, 2021. Interest on the Senior Notes due 2021 is payable semi-annually on February 1 and August 1 of eachyear, which began on August 1, 2013. Interest on the Senior Notes due 2021 will be paid at the rate of (i) 12.0% per annum in cash and (ii) 2.0% per annumthrough the issuance of payment-in-kind notes (the “PIK Notes”). Any PIK Notes issued in certificated form will be dated as of the applicable interestpayment date and will bear interest from and after such date. All PIK Notes issued will mature on February 1, 2021 and have the same rights and benefits asthe Senior Notes due 2021. The Senior Notes due 2021 are fully and unconditionally guaranteed on a senior basis by the guarantors named in the indenturegoverning such notes. The guarantee is structurally subordinated to all existing and future indebtedness and other liabilities of any subsidiary of theapplicable subsidiary guarantor that is not also a guarantor of the Senior Notes due 2021. The guarantees are subordinated to the guarantees ofiHeartCommunications’ senior secured credit facility and certain other permitted debt, but rank equal to all other senior indebtedness of the guarantors.
19
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
iHeartCommunications may redeem the Senior Notes due 2021, in whole or in part, within certain dates, at the redemption prices set forth in the indentureplus accrued and unpaid interest to the redemption date.
The indenture governing the Senior Notes due 2021 contains covenants that limit iHeartCommunications’ ability and the ability of its restricted subsidiariesto, among other things: (i) incur additional indebtedness or issue certain preferred stock; (ii) pay dividends on, or make distributions in respect of, theircapital stock or repurchase their capital stock; (iii) make certain investments or other restricted payments; (iv) sell certain assets; (v) create liens or use assetsas security in other transactions; (vi) merge, consolidate or transfer or dispose of substantially all of their assets; (vii) engage in transactions with affiliates;and (viii) designate their subsidiaries as unrestricted subsidiaries.
iHeartCommunications Legacy Notes
As of December 31, 2014, iHeartCommunications had outstanding senior notes (net of $57.1 million aggregate principal amount held by a subsidiary ofiHeartCommunications) consisting of:
(In thousands) December 31,
2014 December 31,
2013 5.5% Senior Notes Due 2014 $ - 461,455 4.9% Senior Notes Due 2015 - 250,000 5.5% Senior Notes Due 2016 192,900 250,000 6.875% Senior Notes Due 2018 175,000 175,000 7.25% Senior Notes Due 2027 300,000 300,000
Total Legacy Notes $ 667,900 1,436,455
These senior notes were the obligations of iHeartCommunications prior to the merger. The senior notes are senior, unsecured obligations that are effectivelysubordinated to iHeartCommunications’ secured indebtedness to the extent of the value of iHeartCommunications’ assets securing such indebtedness and arenot guaranteed by any of iHeartCommunications’ subsidiaries and, as a result, are structurally subordinated to all indebtedness and other liabilities ofiHeartCommunications’ subsidiaries. The senior notes rank equally in right of payment with all of iHeartCommunications’ existing and future seniorindebtedness and senior in right of payment to all existing and future subordinated indebtedness.
10.0% Senior Notes due 2018
As of December 31, 2014, iHeartCommunications had outstanding $730.0 million aggregate principal amount of senior notes due 2018 (net of $120.0million aggregate principal amount held by a subsidiary of iHeartCommunications). The senior notes due 2018 mature on January 15, 2018 and bear interestat a rate of 10.0% per annum, payable semi-annually on January 15 and July 15 of each year, which began on July 15, 2014.
The senior notes due 2018 are senior, unsecured obligations that are effectively subordinated to iHeartCommunications’ secured indebtedness to the extentof the value of iHeartCommunications’ assets securing such indebtedness and are not guaranteed by any of iHeartCommunications’ subsidiaries and, as aresult, are structurally subordinated to all indebtedness and other liabilities of iHeartCommunications’ subsidiaries. The senior notes due 2018 rank equallyin right of payment with all of iHeartCommunications’ existing and future senior indebtedness and senior in right of payment to all existing and futuresubordinated indebtedness.
20
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Subsidiary Senior Notes
As of December 31, 2014, the Company’s subsidiary, Clear Channel Worldwide Holdings, Inc. (“CCWH”) had outstanding notes consisting of:
(In thousands)
Maturity Date Interest Rate Interest Payment Terms December 31,
2014 December 31,
2013 CCWH Senior Notes:6.5% Series A Senior Notes Due 2022 11/15/2022 6.5% Payable to the trustee weekly
in arrears and to thenoteholders on May 15 andNovember 15 of each year
$ 735,750 735,750
6.5% Series B Senior Notes Due 2022 11/15/2022 6.5% Payable to the trustee weeklyin arrears and to the
noteholders on May 15 andNovember 15 of each year
1,989,250 1,989,250
CCWH Senior Subordinated Notes:7.625% Series A Senior Notes Due 2020 3/15/2020 7.625% Payable to the trustee weekly
in arrears and to thenoteholders on March 15
andSeptember 15 of each year
275,000 275,000
7.625% Series B Senior Notes Due 2020 3/15/2020 7.625% Payable to the trustee weeklyin arrears and to the
noteholders on March 15and
September 15 of each year
1,925,000 1,925,000
Total CCWH Notes $ 4,925,000 4,925,000
Guarantees and Security
The CCWH Senior Notes are guaranteed by CCOH, Clear Channel Outdoor, Inc. (“CCOI”) and certain of CCOH’s direct and indirect subsidiaries. The CCWHSenior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by CCOH, CCOI and certain ofCCOH’s other domestic subsidiaries and rank junior to each guarantor’s existing and future senior debt, including the CCWH Senior Notes, equally with eachguarantor’s existing and future senior subordinated debt and ahead of each guarantor’s existing and future debt that expressly provides that it is subordinatedto the guarantees of the CCWH Senior Subordinated Notes.
The CCWH Senior Notes are senior obligations that rank pari passu in right of payment to all unsubordinated indebtedness of CCWH and the guarantees ofthe CCWH Senior Notes rank pari passu in right of payment to all unsubordinated indebtedness of the guarantors. The CCWH Senior Subordinated Notes areunsecured senior subordinated obligations that rank junior to all of CCWH’s existing and future senior debt, including the CCWH Senior Notes, equally withany of CCWH’s existing and future senior subordinated debt and ahead of all of CCWH’s existing and future debt that expressly provides that it issubordinated to the CCWH Subordinated Notes.
Redemptions
CCWH may redeem the Subsidiary Senior Notes at its option, in whole or part, at redemption prices set forth in the indentures plus accrued and unpaidinterest to the redemption dates and plus an applicable premium.
21
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain Covenants
The indentures governing the Subsidiary Senior Notes contain covenants that limit CCOH and its restricted subsidiaries ability to, among other things:
• incur or guarantee additional debt or issue certain preferred stock;
• in case of the Senior Notes, create liens on its restricted subsidiaries’ assets to secure such debt;
• create restrictions on the payment of dividends or other amounts;
• enter into certain transactions with affiliates;
• merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of its assets; and
• sell certain assets, including capital stock of its subsidiaries.
Future Maturities of Long-term Debt
Future maturities of long-term debt at December 31, 2014 are as follows: (in thousands) 2015 $ 3,604 2016 1,126,920 2017 8,208 2018 909,272 2019 8,300,043 Thereafter 10,212,868 Total (1) $ 20,560,915
(1) Excludes purchase accounting adjustments and original issue discount of $234.9 million, which is amortized through interest expense over the
life of the underlying debt obligations.
NOTE 6 – FAIR VALUE MEASUREMENTSASC 820-10-35 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly orindirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its ownassumptions.
Marketable Equity Securities
The Company’s marketable equity securities are measured at fair value on each reporting date.
The marketable equity securities are measured at fair value using quoted prices in active markets. Due to the fact that the inputs used to measure themarketable equity securities at fair value are observable, the Company has categorized the fair value measurements of the securities as Level 1.
22
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost, unrealized holding gains or losses, and fair value of the Company’s investments at December 31, 2014 and 2013 are as follows: (In thousands) Gross
During 2013, the Company sold shares of Sirius XM Radio, Inc. held by it for $135.5 million. In connection with the sale of shares of Sirius XM Radio, Inc., arealized gain of $130.9 million and income tax expense of $48.6 million were reclassified out of accumulated other comprehensive loss into “Gain onmarketable securities” and “Income tax benefit,” respectively. The net difference of $82.3 million is reported as a reduction of “Other comprehensive income(loss).”
Other cost investments include various investments in companies for which there is no readily determinable market value. The Company recognized other-than-temporary impairments of $2.0 million on a cost investment for the year ended December 31, 2012, which was a non-cash impairment charge recorded in“Loss on marketable securities.”
NOTE 7 – COMMITMENTS AND CONTINGENCIESThe Company accounts for its rentals that include renewal options, annual rent escalation clauses, minimum franchise payments and maintenance related todisplays under the guidance in ASC 840.
The Company considers its non-cancelable contracts that enable it to display advertising on buses, bus shelters, trains, etc. to be leases in accordance with theguidance in ASC 840-10. These contracts may contain minimum annual franchise payments which generally escalate each year. The Company accounts forthese minimum franchise payments on a straight-line basis. If the rental increases are not scheduled in the lease, such as an increase based on subsequentchanges in the index or rate, those rents are considered contingent rentals and are recorded as expense when accruable. Other contracts may contain a variablerent component based on revenue. The Company accounts for these variable components as contingent rentals and records these payments as expense whenaccruable. No single contract or lease is material to the Company’s operations.
The Company accounts for annual rent escalation clauses included in the lease term on a straight-line basis under the guidance in ASC 840-20-25. TheCompany considers renewal periods in determining its lease terms if at inception of the lease there is reasonable assurance the lease will berenewed. Expenditures for maintenance are charged to operations as incurred, whereas expenditures for renewal and betterments are capitalized.
The Company leases office space, certain broadcasting facilities, equipment and the majority of the land occupied by its outdoor advertising structures underlong-term operating leases. The Company accounts for these leases in accordance with the policies described above.
The Company’s contracts with municipal bodies or private companies relating to street furniture, billboards, transit and malls generally require the Companyto build bus stops, kiosks and other public amenities or advertising structures during the term of the contract. The Company owns these structures and isgenerally allowed to advertise on them for the remaining term of the contract. Once the Company has built the structure, the cost is capitalized and expensedover the shorter of the economic life of the asset or the remaining life of the contract.
23
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the Company has commitments relating to required purchases of property, plant and equipment under certain street furniture contracts. Certain ofthe Company’s contracts contain penalties for not fulfilling its commitments related to its obligations to build bus stops, kiosks and other public amenities oradvertising structures. Historically, any such penalties have not materially impacted the Company’s financial position or results of operations.
Certain acquisition agreements include deferred consideration payments based on performance requirements by the seller typically involving the completionof a development or obtaining appropriate permits that enable the Company to construct additional advertising displays. At December 31, 2014, theCompany believes its maximum aggregate contingency, which is subject to performance requirements by the seller, is approximately $30.0 million. As thecontingencies have not been met or resolved as of December 31, 2014, these amounts are not recorded.
As of December 31, 2014, the Company’s future minimum rental commitments under non-cancelable operating lease agreements with terms in excess of oneyear, minimum payments under non-cancelable contracts in excess of one year, capital expenditure commitments and employment/talent contracts consist ofthe following: (In thousands) Capital
Rent expense charged to operations for the years ended December 31, 2014, 2013 and 2012 was $1.17 billion, $1.16 billion and $1.14 billion, respectively.
In various areas in which the Company operates, outdoor advertising is the object of restrictive and, in some cases, prohibitive zoning and other regulatoryprovisions, either enacted or proposed. The impact to the Company of loss of displays due to governmental action has been somewhat mitigated by Federaland state laws mandating compensation for such loss and constitutional restraints.
The Company and its subsidiaries are involved in certain legal proceedings arising in the ordinary course of business and, as required, have accrued anestimate of the probable costs for the resolution of those claims for which the occurrence of loss is probable and the amount can be reasonablyestimated. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination oflitigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changesin the Company’s assumptions or the effectiveness of its strategies related to these proceedings. Additionally, due to the inherent uncertainty of litigation,there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s financialcondition or results of operations.
Although the Company is involved in a variety of legal proceedings in the ordinary course of business, a large portion of its litigation arises in the followingcontexts: commercial disputes; defamation matters; employment and benefits related claims; governmental fines; intellectual property claims; and taxdisputes.
24
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Los Angeles Litigation
In 2008, Summit Media, LLC, one of the Company’s competitors, sued the City of Los Angeles (the “City”), Clear Channel Outdoor, Inc. and CBS Outdoorin Los Angeles Superior Court (Case No. BS116611) challenging the validity of a settlement agreement that had been entered into in November 2006 amongthe parties and pursuant to which Clear Channel Outdoor, Inc. had taken down existing billboards and converted 83 existing signs from static displays todigital displays. In 2009 the Los Angeles Superior Court ruled that the settlement agreement constituted an ultra vires act of the City, and nullified itsexistence. After further proceedings, on April 12, 2013 the Los Angeles Superior Court invalidated 82 digital modernization permits issued to Clear ChannelOutdoor, Inc. (77 of which displays were operating at the time of the ruling), and Clear Channel Outdoor, Inc. was required to turn off the electrical power toall affected digital displays on April 15, 2013. The digital display structures remain intact but digital displays are currently prohibited in the City. ClearChannel Outdoor, Inc. is seeking permits under the existing City sign code to either wrap the LED faces with vinyl or convert the LED faces to traditionalstatic signs, and has obtained a number of such permits. Clear Channel Outdoor, Inc. is also pursuing a new ordinance to permit digital signage in the City.
NOTE 8 – GUARANTEESAs of December 31, 2014, iHeartCommunications had outstanding surety bonds and commercial standby letters of credit of $47.7 million and$113.9 million, respectively, of which no letters of credit were cash secured. These letters of credit and surety bonds relate to various operational mattersincluding insurance, bid, concession and performance bonds as well as other items.
As of December 31, 2014, iHeartCommunications had outstanding bank guarantees of $55.1 million. Bank guarantees in the amount of $15.2 million arebacked by cash collateral.
NOTE 9 – INCOME TAXESSignificant components of the provision for income tax benefit (expense) are as follows: (In thousands) Years Ended December 31, 2014 2013 2012 Current - Federal $ (503) $ 10,586 $ 61,655 Current - foreign (27,256) (48,466) (48,579) Current - state 3,193 1,527 (9,408)
Total current benefit (expense) (24,566) (36,353) 3,668 Deferred - Federal (29,284) 126,905 261,014 Deferred - foreign 4,308 8,932 27,970 Deferred - state (8,947) 22,333 15,627
Total deferred benefit (expense) (33,923) 158,170 304,611 Income tax benefit (expense) $ (58,489) $ 121,817 $ 308,279
Current tax expense of $24.6 million was recorded for 2014 as compared to a current tax expense of $36.4 million for 2013. The change in current tax wasprimarily due to a reduction in unrecognized tax benefits during 2014, which resulted from the expiration of statutes of limitations to assess taxes in theUnited Kingdom and several state jurisdictions. This decrease in unrecognized tax benefits resulted in a reduction to current tax expense of $35.4 millionduring 2014.
Current tax expense of $36.4 million was recorded for 2013 as compared to a current tax benefit of $3.7 million for 2012. The change in current tax wasprimarily due to the Company’s settlement of U.S. federal and foreign tax examinations during 2012. Pursuant to the settlements, the Company recorded areduction to current income tax expense of approximately $67.3 million during 2012 to reflect the net current tax benefits of the settlements.
Deferred tax expense of $33.9 million was recorded for 2014 compared with deferred tax benefit of $158.2 million for 2013. The change in deferred tax isprimarily due to the valuation allowance of $339.8 million recorded against the Company’s current period federal and state net operating losses during 2014.
25
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax benefit of $158.2 million for 2013 primarily relates to cancellation of debt income recognized during the year as a result of certain debtrestructuring transactions, and is lower when compared with the deferred tax benefit of $304.6 million for 2012. The decrease in deferred tax benefit in 2013is primarily due to the valuation allowance of $143.5 million recorded against a portion of the Company’s federal and state net operating losses.
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2014 and 2013 are as follows: (In thousands) 2014 2013 Deferred tax liabilities:
Intangibles and fixed assets $ 2,335,584 $ 2,402,168 Long-term debt 119,887 183,615 Investments in nonconsolidated affiliates 1,121 - Other investments 5,575 6,759 Other 8,857 6,655
Total deferred tax liabilities 2,471,024 2,599,197
Deferred tax assets:Accrued expenses 111,884 106,651 Investments in nonconsolidated affiliates - 1,824 Net operating loss carryforwards 1,445,340 1,287,239 Bad debt reserves 9,346 9,726 Other 34,017 35,527
Total deferred tax assets 944,929 1,113,344 Net deferred tax liabilities $ 1,526,095 $ 1,485,853
Included in the Company’s net deferred tax liabilities are $37.8 million and $52.0 million of current net deferred tax assets for 2014 and 2013, respectively.The Company presents these assets in “Other current assets” on its consolidated balance sheets. The remaining $1.6 billion and $1.5 billion of net deferredtax liabilities for 2014 and 2013, respectively, are presented in “Deferred tax liabilities” on the consolidated balance sheets.
The Company’s net foreign deferred tax liabilities were $13.6 million and $19.8 million for the periods ended December 31, 2014 and December 31, 2013,respectively.
The deferred tax liability related to intangibles and fixed assets primarily relates to the difference in book and tax basis of acquired FCC licenses, billboardpermits and tax deductible goodwill created from the Company’s various stock acquisitions. In accordance with ASC 350-10, Intangibles—Goodwill andOther, the Company does not amortize FCC licenses and billboard permits. As a result, this deferred tax liability will not reverse over time unless theCompany recognizes future impairment charges related to its FCC licenses, permits and tax deductible goodwill or sells its FCC licenses or permits. As theCompany continues to amortize its tax basis in its FCC licenses, permits and tax deductible goodwill, the deferred tax liability will increase over time.
At December 31, 2014, the Company had recorded net operating loss carryforwards (tax effected) for federal and state income tax purposes of approximately$1.3 billion, expiring in various amounts through 2034. The Company expects to realize the benefits of a portion of its deferred tax assets attributable tofederal and state net operating losses based upon expected future taxable income from deferred tax liabilities that reverse in the relevant federal and statejurisdictions and carryforward periods. As of December 31, 2014, the Company has recorded a partial valuation allowance of $487.1 million against thesedeferred tax assets attributable to federal and state net operating losses. In addition, the Company had recorded deferred tax assets for foreign net operatingloss carryforwards (tax effected) of approximately $153.0 million which are offset in part by an associated valuation allowance of $146.4 million. Additionaldeferred tax valuation allowance of $22.1 million offsets other foreign deferred tax assets that are not expected to be realized. Realization of these foreigndeferred tax assets is dependent upon the Company’s ability to generate future taxable income in appropriate tax jurisdictions and carryforward periods. Dueto the Company’s evaluation of negative factors including particular
26
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
negative evidence of cumulative losses in these jurisdictions, the Company continues to record valuation allowances on the foreign deferred tax assets thatare not expected to be realized. The Company expects to realize its remaining gross deferred tax assets based upon its assessment of deferred tax liabilitiesthat will reverse in the same carryforward period and jurisdiction and are of the same character as the net operating loss carryforwards and temporarydifferences that give rise to the deferred tax assets. Any deferred tax liabilities associated with acquired FCC licenses, billboard permits and tax-deductiblegoodwill intangible assets are not relied upon as a source of future taxable income, as these intangible assets have an indefinite life.
At December 31, 2014, net deferred tax liabilities include a deferred tax asset of $28.9 million relating to stock-based compensation expense under ASC 718-10, Compensation—Stock Compensation. Full realization of this deferred tax asset requires stock options to be exercised at a price equaling or exceeding thesum of the grant price plus the fair value of the option at the grant date and restricted stock to vest at a price equaling or exceeding the fair market value at thegrant date. Accordingly, there can be no assurance that the stock price of the Company’s common stock will rise to levels sufficient to realize the entiredeferred tax benefit currently reflected in its balance sheet.
The reconciliation of income tax computed at the U.S. Federal statutory tax rates to income tax benefit is: Years Ended December 31,(In thousands) 2014 2013 2012 Amount Percent Amount Percent Amount Percent Income tax benefit at statutory rates $ 246,284 35% $ 246,867 35% $ 251,814 35%State income taxes, net of federal tax effect 26,518 4% 32,768 4% 6,218 1%Foreign income taxes 11,074 2% (22,640) (3%) 8,782 2%Nondeductible items (5,533) (1%) (4,870) (1%) (4,617) (1%)Changes in valuation allowance and other estimates (333,641) (47%) (135,161) (19%) 50,697 7%Other, net (3,191) (1%) 4,853 1% (4,615) (1%)Income tax benefit (expense) $ (58,489) (8%) $ 121,817 17% $ 308,279 43%
The Company’s effective tax rate for the year ended December 31, 2014 is (8%). The effective tax rate for 2014 was impacted by the $339.8 million valuationallowance recorded during the period as additional deferred tax expense. The valuation allowance was recorded against the Company’s current period federaland state net operating losses due to the uncertainty of the ability to utilize those losses in future periods. This expense was partially offset by $28.9 millionin net tax benefits associated with a decrease in unrecognized tax benefits resulting from the expiration of statute of limitations to assess taxes in the UnitedKingdom and several state jurisdictions. Foreign income before income taxes was approximately $97.2 million for 2014, and it should be noted that withlimited exceptions, tax rates in our foreign jurisdictions are lower than that of the U.S. federal statutory rate.
A tax benefit was recorded for the year ended December 31, 2013 of 17%. The effective tax rate for 2013 was impacted by the $143.5 million valuationallowance recorded during the period as additional deferred tax expense. The valuation allowance was recorded against a portion of the federal and state netoperating losses due to the uncertainty of the ability to utilize those losses in future periods. This expense was partially offset by $20.2 million in net taxbenefits recorded during the period due to the settlement of certain U.S. federal and state tax examinations during the year. Foreign income before incometaxes was approximately $48.3 million for 2013.
A tax benefit was recorded for the year ended December 31, 2012 of 43%. The effective tax rate for 2012 was impacted by the Company’s settlement of U.S.federal and foreign tax examinations during the year. Pursuant to the settlements, the Company recorded a reduction to income tax expense of approximately$60.6 million to reflect the net tax benefits of the settlements. This benefit was partially offset by additional tax recorded during 2012 related to the write-offof deferred tax assets associated with the vesting of certain equity awards. Foreign income before income taxes was approximately $84.0 million for 2012.
The Company continues to record interest and penalties related to unrecognized tax benefits in current income tax expense. The total amount of interestaccrued at December 31, 2014 and 2013 was $40.8 million and $49.4 million, respectively. The total amount of unrecognized tax benefits and accruedinterest and penalties at December 31, 2014 and 2013 was $147.7 million and $178.8 million,
27
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, of which $110.4 million and $131.0 million is included in “Other long-term liabilities”, and $2.3 million and $11.6 million is included in“Accrued Expenses” on the Company’s consolidated balance sheets, respectively. In addition, $35.0 million and $36.1 million of unrecognized tax benefitsare recorded net with the Company’s deferred tax assets for its net operating losses as opposed to being recorded in “Other long-term liabilities” atDecember 31, 2014 and 2013, respectively. The total amount of unrecognized tax benefits at December 31, 2014 and 2013 that, if recognized, would impactthe effective income tax rate is $68.8 million and $100.1 million, respectively. (In thousands) Years Ended December 31, Unrecognized Tax Benefits 2014 2013 Balance at beginning of period $ 129,375 $ 138,437
Increases for tax position taken in the current year 13,848 12,004 Increases for tax positions taken in previous years 6,003 13,163 Decreases for tax position taken in previous years (9,764) (21,928) Decreases due to settlements with tax authorities (8,181) (1,113) Decreases due to lapse of statute of limitations (24,367) (11,188)
Balance at end of period $ 106,914 $ 129,375
The Company and its subsidiaries file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. During 2014, thestatute of limitations for certain tax years expired in the United Kingdom and several state jurisdictions resulting in a reduction to unrecognized tax benefitsof $24.4 million, excluding interest. Also during 2014, the Company settled certain U.S. federal and state examinations with taxing authorities, resulting indecreases in unrecognized tax benefits relating to cash tax payments of $8.2 million. All federal income tax matters through 2008 are closed and theCompany has effectively settled the 2009 and 2010 examinations with the IRS and is awaiting final approval of the settlement from the Joint Committee onTaxation. The IRS is currently auditing the Company’s tax returns for the 2011 and 2012 periods. Substantially all material state, local, and foreign incometax matters have been concluded for years through 2005.
NOTE 10 – SHAREHOLDERS’ DEFICITThe Company reports its noncontrolling interests in consolidated subsidiaries as a component of equity separate from the Company’s equity. The followingtable shows the changes in member’s deficit attributable to the Company and the noncontrolling interests of subsidiaries in which the Company has amajority, but not total ownership interest: (In thousands)
The Company Noncontrolling
Interests Consolidated Balances at January 1, 2014 $ (8,942,166) $ 245,531 $ (8,696,635)
Net income (loss) (793,761) 31,603 (762,158) Dividends and other payments to noncontrolling interests - (40,027) (40,027) Purchase of additional noncontrolling interests (46,806) (1,944) (48,750) Foreign currency translation adjustments (101,980) (19,898) (121,878) Unrealized holding gain on marketable securities 285 42 327 Other adjustments to comprehensive loss (10,214) (1,224) (11,438) Reclassifications 3,317 - 3,317 Other, net 1,977 10,057 12,034
Balances at December 31, 2014 $ (9,889,348) $ 224,140 $ (9,665,208)
(In thousands)
The Company Noncontrolling
Interests Consolidated Balances at January 1, 2013 $ (8,299,188) $ 303,997 $ (7,995,191)
Net income (loss) (606,883) 23,366 (583,517) Dividends and other payments to noncontrolling interests - (91,887) (91,887) Foreign currency translation adjustments (29,755) (3,246) (33,001) Unrealized holding gain on marketable securities 16,439 137 16,576 Unrealized holding gain on cash flow derivatives 48,180 - 48,180 Other adjustments to comprehensive loss 5,932 800 6,732 Reclassifications (83,585) (167) (83,752) Other, net 6,694 12,531 19,225
Balances at December 31, 2013$ (8,942,166) $ 245,531 $ (8,696,635)
28
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dividends
The Company has not paid cash dividends since its formation and its ability to pay dividends is subject to restrictions should it seek to do so in the future.iHeart’s debt financing arrangements include restrictions on its ability to pay dividends thereby limiting the Company’s ability to pay dividends.
Share-Based Compensation
Stock Options
The Company does not have any compensation plans under which it grants stock awards to employees. Prior to the merger, iHeartCommunications grantedoptions to purchase its common stock to its employees and directors and its affiliates under its various equity incentive plans typically at no less than the fairvalue of the underlying stock on the date of grant. These options were granted for a term not exceeding ten years and were forfeited, except in certaincircumstances, in the event the employee or director terminated his or her employment or relationship with iHeartCommunications or one of its affiliates.Prior to acceleration, if any, in connection with the merger, these options vested over a period of up to five years. All equity incentive plans contained anti-dilutive provisions that permitted an adjustment of the number of shares of iHeartCommunications’ common stock represented by each option for any changein capitalization.
The Company has granted options to purchase its shares of Class A common stock to certain key executives under its equity incentive plan at no less than thefair value of the underlying stock on the date of grant. These options are granted for a term not to exceed ten years and are forfeited, except in certaincircumstances, in the event the executive terminates his or her employment or relationship with the Company or one of its affiliates. Approximately three-fourths of the options outstanding at December 31, 2014 vest based solely on continued service over a period of up to five years with the remainderbecoming eligible to vest over a period of up to five years if certain predetermined performance targets are met. The equity incentive plan containsantidilutive provisions that permit an adjustment of the number of shares of Parent’s common stock represented by each option for any change incapitalization.
The Company accounts for its share-based payments using the fair value recognition provisions of ASC 718-10. The fair value of the portion of options thatvest based on continued service is estimated on the grant date using a Black-Scholes option-pricing model and the fair value of the remaining options whichcontain vesting provisions subject to service, market and performance conditions is estimated on the grant date using a Monte Carlo model. Expectedvolatilities were based on historical volatility of peer companies’ stock, including the Company, over the expected life of the options. The expected life ofthe options granted represents the period of time that the options granted are expected to be outstanding. The Company used historical data to estimateoption exercises and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updatesthe estimated forfeiture rate through the final vesting date of awards. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time ofgrant for periods equal to the expected life of the option. No options were granted during the years ended December 31, 2014 and 2013. The followingassumptions were used to calculate the fair value of the options granted during the year ended December 31, 2012: Years Ended December 31, 2014(1) 2013(1) 2012 Expected volatility N/A N/A 71% – 77%Expected life in years N/A N/A 6.3 – 6.5Risk-free interest rate N/A N/A 0.97% – 1.55%Dividend yield N/A N/A 0% (1) No options were granted in 2013 and 2014
29
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents a summary of the Company’s stock options outstanding at and stock option activity during the year ended December 31, 2014(“Price” reflects the weighted average exercise price per share): (In thousands, except per share data)
Outstanding, December 31, 2014 (2) 2,301 32.85 4.3yearsExercisable 1,480 31.95 4.0yearsExpected to Vest 797 35.20 4.7years
(1) The weighted average grant date fair value of options granted during the years ended December 31, 2012 was $2.68 per share. No options were
granted during the years ended December 31, 2013 and 2014.
(2) Non-cash compensation expense has not been recorded with respect to 0.6 million shares as the vesting of these options is subject to
performance conditions that have not yet been determined probable to meet.
A summary of the Company’s unvested options and changes during the year ended December 31, 2014 is presented below: (In thousands, except per share data)
(1) The total fair value of the options vested during the years ended December 31, 2014, 2013 and 2012 was $0.3 million, $6.3 million and
$3.9 million, respectively.
Restricted Stock Awards
The Company has granted restricted stock awards to its employees and affiliates under its equity incentive plan. The restricted stock awards are restricted intransferability for a term of up to five years. Restricted stock awards are forfeited, except in certain circumstances, in the event the employee terminates his orher employment or relationship with the Company prior to the lapse of the restriction. Dividends or distributions paid in respect of unvested restricted stockawards will be held by the Company and paid to the recipients of the restricted stock awards upon vesting of the shares.
The following table presents a summary of the Company’s restricted stock outstanding and restricted stock activity as of and during the year endedDecember 31, 2014 (“Price” reflects the weighted average share price at the date of grant): (In thousands, except per share data) Awards Price Outstanding, January 1, 2014 3,919 $ 3.35
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CCOH Share-Based Awards
CCOH Stock Options
The Company’s subsidiary, CCOH, has granted options to purchase shares of its Class A common stock to employees and directors of CCOH and its affiliatesunder its equity incentive plan at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term notexceeding ten years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationshipwith CCOH or one of its affiliates. These options vest solely on continued service over a period of up to five years. The equity incentive stock plan containsanti-dilutive provisions that permit an adjustment of the number of shares of CCOH’s common stock represented by each option for any change incapitalization. CCOH determined that the CCOH dividend discussed in Note 5 was considered a change in capitalization and therefore adjusted outstandingoptions as of March 15, 2012. No incremental compensation cost was recognized in connection with the adjustment.
The fair value of each option awarded on CCOH common stock is estimated on the date of grant using a Black-Scholes option-pricing model. Expectedvolatilities are based on historical volatility of CCOH’s stock over the expected life of the options. The expected life of options granted represents the periodof time that options granted are expected to be outstanding. CCOH uses historical data to estimate option exercises and employee terminations within thevaluation model. CCOH includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date ofawards. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods equal to the expected life of the option.The following assumptions were used to calculate the fair value of CCOH’s options on the date of grant: Years Ended December 31, 2014 2013 2012 Expected volatility 54% – 56% 55% – 56% 54% – 56%Expected life in years 6.3 6.3 6.3Risk-free interest rate 1.73% – 2.08% 1.05% – 2.19% 0.92% – 1.48%Dividend yield 0% 0% 0%
The following table presents a summary of CCOH’s stock options outstanding at and stock option activity during the year ended December 31, 2014 (“Price”reflects the weighted average exercise price per share): (In thousands, except per share data)
Outstanding, December 31, 2014 6,025 9.92 5.1years $13,956 Exercisable 4,471 10.56 4.1years $10,065 Expected to vest 1,487 8.08 7.8years $3,729
(1) The weighted average grant date fair value of CCOH options granted during the years ended December 31, 2014, 2013 and 2012 was $4.69,
$4.10 and $4.43 per share, respectively.
(2) Cash received from option exercises during the years ended December 31, 2014, 2013 and 2012 was $2.4 million, $4.2 million and $6.4 million,
respectively. The total intrinsic value of the options exercised during the years ended December 31, 2014, 2013 and 2012 was $1.5 million,$5.0 million and $7.9 million, respectively.
31
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of CCOH’s unvested options at and changes during the year ended December 31, 2014 is presented below: (In thousands, except per share data)
(1) The total fair value of CCOH options vested during the years ended December 31, 2014, 2013 and 2012 was $6.1 million, $7.1 million and
$11.5 million, respectively.
CCOH Restricted Stock Awards
CCOH has also granted both restricted stock and restricted stock unit awards to its employees and affiliates under its equity incentive plan. The restrictedstock awards represent shares of Class A common stock that hold a legend which restricts their transferability for a term of up to five years. The restrictedstock units represent the right to receive shares upon vesting, which is generally over a period of up to five years. Both restricted stock awards and restrictedstock units are forfeited, except in certain circumstances, in the event the employee terminates his or her employment or relationship with CCOH prior to thelapse of the restriction.
The following table presents a summary of CCOH’s restricted stock and restricted stock units outstanding at and activity during the year ended December 31,2014 (“Price” reflects the weighted average share price at the date of grant): (In thousands, except per share data) Awards Price Outstanding, January 1, 2014 1,892 $ 6.83
The share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basisover the vesting period. Share-based compensation payments are recorded in corporate expenses and were $10.7 million, $16.7 million and $28.5 million,during the years ended December 31, 2014, 2013 and 2012, respectively.
The tax benefit related to the share-based compensation expense for the years ended December 31, 2014, 2013 and 2012 was $4.1 million, $6.3 million and$10.8 million, respectively.
As of December 31, 2014, there was $22.4 million of unrecognized compensation cost related to unvested share-based compensation arrangements that willvest based on service conditions. This cost is expected to be recognized over a weighted average period of approximately three years. In addition, as ofDecember 31, 2014, there was $24.7 million of unrecognized compensation cost related to unvested share-based compensation arrangements that will vestbased on market, performance and service conditions. This cost will be recognized when it becomes probable that the performance condition will be satisfied.
The Company completed a voluntary stock option exchange program on November 19, 2012 and exchanged 2.0 million stock options granted under theClear Channel 2008 Executive Incentive Plan for 1.8 million replacement restricted share awards with different service and performance conditions. TheCompany accounted for the exchange program as a modification of the existing awards under ASC 718 and will recognize incremental compensationexpense of approximately $1.7 million over the service period of the new awards. In connection with the exchange program, the Company granted anadditional 1.5 million restricted stock awards pursuant to a tax assistance program offered to employees participating in the exchange. Of the total 1.5 millionrestricted stock awards granted, 0.9 million were repurchased by the Company upon expiration of the exchange program while the remaining 0.6 millionawards were forfeited. The Company recognized $2.6 million of expense related to the awards granted in connection with the tax assistance program. (In thousands, except per share data) Years Ended December 31, 2014 2013 2012 NUMERATOR:Net loss attributable to the Company – common shares $ (793,761) $ (606,883) $ (424,479) Less: Participating securities dividends - 2,566 8,456 Less: Income (loss) attributable to the Company – unvested shares - - - Net loss attributable to the Company per common share – basic and diluted $ (793,761) $ (609,449) $ (432,935)
DENOMINATOR:Weighted average common shares outstanding – basic 83,941 83,364 82,745 Effect of dilutive securities:Stock options and common stock warrants(1) - - -
Weighted average common shares outstanding – diluted 83,941 83,364 82,745
Net loss attributable to the Company per common share:Basic $ (9.46) $ (7.31) $ (5.23) Diluted $ (9.46) $ (7.31) $ (5.23)
(1) 6.8 million, 6.4 million and 5.4 million stock options and restricted shares were outstanding at December 31, 2014, 2013 and 2012, respectively,
that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
32
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 – EMPLOYEE STOCK AND SAVINGS PLANSiHeartCommunications has various 401(k) savings and other plans for the purpose of providing retirement benefits for substantially all employees. Underthese plans, an employee can make pre-tax contributions and iHeartCommunications will match a portion of such an employee’s contribution. Employeesvest in these iHeartCommunications matching contributions based upon their years of service to iHeartCommunications. Contributions of $27.6 million,$26.6 million and $29.5 million to these plans for the years ended December 31, 2014, 2013 and 2012, respectively, were expensed.
iHeartCommunications offers a non-qualified deferred compensation plan for a select group of management or highly compensated employees, under whichsuch employees were able to make an annual election to defer up to 50% of their annual salary and up to 80% of their bonus before taxes.iHeartCommunications suspended all salary and bonus deferrals and company matching contributions to the deferred compensation plan on January 1, 2010.iHeartCommunications accounts for the plan in accordance with the provisions of ASC 710-10. Matching credits on amounts deferred may be made iniHeartCommunications’ sole discretion and iHeartCommunications retains ownership of all assets until distributed. Participants in the plan have theopportunity to allocate their deferrals and any iHeartCommunications matching credits among different investment options, the performance of which is usedto determine the amounts to be paid to participants under the plan. In accordance with the provisions of ASC 710-10, the assets and liabilities of the non-qualified deferred compensation plan are presented in “Other assets” and “Other long-term liabilities” in the accompanying consolidated balance sheets,respectively. The asset and liability under the deferred compensation plan at December 31, 2014 was approximately $11.6 million recorded in “Other assets”and $11.6 million recorded in “Other long-term liabilities”, respectively. The asset and liability under the deferred compensation plan at December 31, 2013was approximately $11.8 million recorded in “Other assets” and $11.8 million recorded in “Other long-term liabilities”, respectively.
NOTE 12 – OTHER INFORMATIONThe following table discloses the components of “Other income (expense)” for the years ended December 31, 2014, 2013 and 2012, respectively: (In thousands) Years Ended December 31, 2014 2013 2012 Foreign exchange gain (loss) $ 15,554 $ 1,772 $ (3,018) Debt modification expenses - (23,555) - Other (6,450) (197) 3,268
Total other income (expense), net $ 9,104 $ (21,980) $ 250
The following table discloses the increase (decrease) in net deferred income tax liabilities related to each component of other comprehensive income (loss)for the years ended December 31, 2014, 2013 and 2012, respectively: (In thousands) Years Ended December 31, 2014 2013 2012 Foreign currency translation adjustments and other $ 2,559 $ (14,421) $ 3,210 Unrealized holding gain on marketable securities - (11,010) 15,324 Unrealized holding gain (loss) on cash flow derivatives - 28,759 30,074
Total increase in deferred tax liabilities $ 2,559 $ 3,328 $ 48,608
The following table discloses the components of “Other current assets” as of December 31, 2014 and 2013, respectively: (In thousands) As of December 31, 2014 2013 Inventory $ 23,777 $ 26,872 Deferred tax asset 37,793 51,967 Deposits 4,466 5,126 Deferred loan costs 32,602 30,165 Other 37,661 47,027
Total other current assets $ 136,299 $ 161,157
33
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table discloses the components of “Other assets” as of December 31, 2014 and 2013, respectively: (In thousands) As of December 31, 2014 2013 Investments in, and advances to, nonconsolidated affiliates $ 9,493 $ 238,805 Other investments 18,247 9,725 Notes receivable 242 302 Prepaid expenses 16,082 24,231 Deferred loan costs 130,267 143,763 Deposits 27,822 26,200 Prepaid rent 56,430 62,864 Non-qualified plan assets 11,568 11,844 Other 18,914 15,722
Total other assets $ 289,065 $ 533,456
The following table discloses the components of “Other long-term liabilities” as of December 31, 2014 and 2013, respectively:
(In thousands) As of December 31, 2014 2013 Unrecognized tax benefits $ 110,410 $ 131,015 Asset retirement obligation 53,936 59,125 Non-qualified plan liabilities 11,568 11,844 Deferred income 23,734 16,247 Deferred rent 125,530 120,092 Employee related liabilities 39,963 31,617 Other 89,722 92,080
Total other long-term liabilities $ 454,863 $ 462,020
The following table discloses the components of “Accumulated other comprehensive loss,” net of tax, as of December 31, 2014 and 2013, respectively: (In thousands) As of December 31, 2014 2013 Cumulative currency translation adjustment $ (291,520) $ (188,920) Cumulative unrealized gain on securities 1,397 1,101 Cumulative other adjustments (18,467) (8,254)
Total accumulated other comprehensive loss $ (308,590) $ (196,073)
NOTE 13 – SEGMENT DATAThe Company’s reportable segments, which it believes best reflect how the Company is currently managed, are iHM, Americas outdoor advertising andInternational outdoor advertising. Revenue and expenses earned and charged between segments are recorded at estimated fair value and eliminated inconsolidation. The iHM segment provides media and entertainment services via broadcast and digital delivery and also includes the Company’s nationalsyndication business. The Americas outdoor advertising segment consists of operations primarily in the United States, Canada and Latin America. TheInternational outdoor advertising segment primarily includes operations in Europe, Asia and Australia. The Americas outdoor and International outdoordisplay inventory consists primarily of billboards, street furniture displays and transit displays. The Other category includes the Company’s mediarepresentation business as well as other general support services and initiatives which are ancillary to the Company’s other businesses. Corporate includesinfrastructure and support, including information technology, human resources, legal, finance and administrative functions of each of the Company’sreportable segments, as well as overall executive, administrative and support functions. Share-based payments are recorded in corporate expenses.
34
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the first quarter of 2015, the Company revised its segment reporting, as discussed in Note 1. The following table presents the Company’s revisedreportable segment results for the years ended December 31, 2014, 2013 and 2012.
Revenue of $1.8 billion, $1.7 billion and $1.7 billion derived from the Company’s foreign operations are included in the data above for the years endedDecember 31, 2014, 2013 and 2012, respectively. Revenue of $4.5 billion, $4.5 billion and $4.5 billion derived from the Company’s U.S. operations areincluded in the data above for the years ended December 31, 2014, 2013 and 2012, respectively.
Identifiable long-lived assets of $682.7 million, $760.5 million and $805.2 million derived from the Company’s foreign operations are included in the dataabove for the years ended December 31, 2014, 2013 and 2012, respectively. Identifiable long-lived assets of $2.0 billion, $2.1 billion and $2.2 billionderived from the Company’s U.S. operations are included in the data above for the years ended December 31, 2014, 2013 and 2012, respectively.
35
IHEARTMEDIA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 – QUARTERLY RESULTS OF OPERATIONS (Unaudited)(In thousands, except per share data)
Three Months Ended
March 31, Three Months Ended
June 30, Three Months Ended
September 30, Three Months Ended
December 31, 2014 2013 2014 2013 2014 2013 2014 2013 Revenue $1,342,548 $1,343,058 $1,630,154 $1,618,097 $1,630,034 $1,587,522 $1,715,797 $1,694,367 Operating expenses:Direct operating expenses 597,688 599,310 644,870 635,528 648,409 651,413 649,983 678,769 Selling, general and administrative expenses 414,636 401,833 418,928 408,399 427,259 408,684 419,800 420,012 Corporate expenses 72,705 80,800 82,197 75,328 78,202 89,574 87,227 67,812 Depreciation and amortization 174,871 182,182 174,062 179,734 175,865 177,330 186,100 191,582 Impairment charges - - 4,902 - 35 - 19,239 16,970 Other operating income, net 165 2,395 (1,628) 1,113 47,172 6,186 (5,678) 13,304 Operating income 82,813 81,328 303,567 320,221 347,436 266,707 347,770 332,526 Interest expense 431,114 385,525 440,605 407,508 432,616 438,404 437,261 418,014 Gain (loss) on marketable securities - - - 130,898 - 31 - (50) Equity in earnings (loss) of nonconsolidated affiliates (13,326) 3,641 (16) 5,971 3,955 3,983 (29) (91,291) Gain (loss) on extinguishment of debt (3,916) (3,888) (47,503) - (4,840) - 12,912 (83,980) Other income (expense), net 1,541 (1,000) 12,157 (18,098) 2,617 1,709 (7,211) (4,591) Income (loss) before income taxes (364,002) (305,444) (172,400) 31,484 (83,448) (165,974) (83,819) (265,400) Income tax benefit (expense) (68,388) 96,325 621 (11,477) (24,376) 73,802 33,654 (36,833) Consolidated net income (loss) (432,390) (209,119) (171,779) 20,007 (107,824) (92,172) (50,165) (302,233) Less amount attributable to noncontrolling interest (8,200) (6,116) 14,852 12,805 7,028 9,683 17,923 6,994 Net income (loss) attributable to the Company $ (424,190) $ (203,003) $ (186,631) $ 7,202 $ (114,852) $ (101,855) $ (68,088) $ (309,227) Net income (loss) to the Company per common share:Basic $ (5.06) $ (2.47) $ (2.22) $ 0.09 $ (1.37) $ (1.22) $ (0.81) $ (3.70) Diluted $ (5.06) $ (2.47) $ (2.22) $ 0.09 $ (1.37) $ (1.22) $ (0.81) $ (3.70)
The Company’s Class A common shares are quoted for trading on the OTC Bulletin Board under the symbol IHRT.
NOTE 15 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONSiHeartCommunications is a party to a management agreement with certain affiliates of Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P. (together,the “Sponsors”) and certain other parties pursuant to which such affiliates of the Sponsors will provide management and financial advisory services until2018. These agreements require management fees to be paid to such affiliates of the Sponsors for such services at a rate not greater than $15.0 million peryear, plus reimbursable expenses. For the years ended December 31, 2014, 2013 and 2012, the Company recognized management fees and reimbursableexpenses of $15.2 million, $15.8 million and $15.9 million, respectively.
Stock Purchases
On August 9, 2010, iHeartCommunications announced that its board of directors approved a stock purchase program under which iHeartCommunications orits subsidiaries may purchase up to an aggregate of $100.0 million of the Company’s Class A common stock and/or the Class A common stock of CCOH. Thestock purchase program does not have a fixed expiration date and may be modified, suspended or terminated at any time at iHeartCommunications’discretion. During 2014, CC Finco purchased 5,000,000 shares of CCOH’s Class A common stock for approximately $48.8 million. During 2012, CC Fincopurchased 111,291 shares of the Company’s Class A common stock for $692,887. During 2011, CC Finco purchased 1,553,971 shares of CCOH’s Class Acommon stock through open market purchases for approximately $16.4 million. As of December 31, 2014, an aggregate $34.2 million was available underthe stock purchase program to purchase the Company’s Class A common stock and/or the Class A common stock of CCOH.
On January 7, 2015 CC Finco purchased an additional 2,000,000 shares of CCOH’s Class A common stock for $20.4 million.
36
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
(In thousands)
Description
Balance atBeginningof period
Chargesto Costs,Expensesand other
Write-offof AccountsReceivable
Other(1)
Balanceat End of
Period Year ended December 31, 2012 $ 63,098 $ 11,715 $ 14,082 $(4,814) $55,917 Year ended December 31, 2013 $ 55,917 $ 20,242 $ 28,492 $ 734 $48,401 Year ended December 31, 2014 $ 48,401 $ 14,167 $ 20,368 $(2,502) $39,698 (1) Primarily foreign currency adjustments and acquisition and/or divestiture activity.
37
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
Deferred Tax Asset Valuation Allowance
(In thousands)
Description
Balance atBeginningof Period
Chargesto Costs,Expenses
and other (1) Reversal (2) Adjustments (3)
Balanceat end of
Period Year ended December 31, 2012 $193,052 $ 14,309 $ (21,727) $ (1,948) $183,686 Year ended December 31, 2013 $183,686 $ 149,107 $ (5) $ (5,165) $327,623 Year ended December 31, 2014 $327,623 $ 356,583 $ (230) $ (28,318) $655,658 (1) During 2012, 2013 and 2014, the Company recorded valuation allowances on deferred tax assets attributable to net operating losses in certain foreign
jurisdictions. In addition, during 2013 and 2014 the Company recorded a valuation allowance of $143.5 million and $339.8 million, respectively, on aportion of its deferred tax assets attributable to federal and state net operating loss carryforwards due to the uncertainty of the ability to utilize thoselosses in future periods.
(2) During 2012, 2013 and 2014, the Company realized the tax benefits associated with certain foreign deferred tax assets, primarily related to foreign losscarryforwards, on which a valuation allowance was previously recorded. The associated valuation allowance was reversed in the period in which, basedon the weight of available evidence, it is more-likely-than-not that the deferred tax asset will be realized.
(3) During 2012, 2013 and 2014, the Company adjusted certain valuation allowances as a result of changes in tax rates in certain jurisdictions and as aresult of the expiration of carryforward periods for net operating loss carryforwards.
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and ShareholdersiHeartMedia, Inc.
We have audited the accompanying consolidated balance sheets of iHeartMedia, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, andthe related consolidated statements of comprehensive loss, changes in shareholders’ deficit and cash flows for each of the three years in the period endedDecember 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 9.01(d), within this Exhibit 99.2. These financialstatements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements andschedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of iHeartMedia, Inc. andsubsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the periodended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLPSan Antonio, TexasFebruary 19, 2015except for Notes 2 and 13 as to which the date is June 24, 2015
![[fh!Y' j!e9 ({,N g )]åN...DRAWING0BY 0¢ 0ë 0Æ 0Ã 0¯ - N} ^ú{ÉXë00{,177266S÷ m%^zË 0LN \ [fh!Y' j!e9 ({,N g )]åN Y iË M nVó(e9OîRM) G 1 DATA m% ^ Y' 7 u: ÿ ÿ ÿ uj](https://static.documents.pub/doc/80x56/6032c1ceb45eef5b0d228901/fhy-je9-n-g-n-drawing0by-0-0-0-0f-0-n-x00177266s.jpg)
